Suncor (TSX:SU)(NYSE:SU) stock is controversial. Some investors think shares are going to $0. Others think there’s huge upside.
This year, shares are 63% lower. The obvious cause is the coronavirus pandemic, which sent oil demand sharply lower. If the stock regains its former levels, there would be 180% in potential upside.
Of course, for Suncor stock to recover, global oil demand would need to normalize. What would need to happen for that future to become reality?
This is the challenge
The biggest challenge is oil prices. As a fossil fuel producer, Suncor will live or die by this single metric. If oil prices move lower long term, profits will fall or even disappear. Only higher commodity pricing will save the stock.
Fortunately, this stock is considered an integrated oil company. That means it owns the entire value chain, from initial production all the way to the end user. Especially in this market, that’s a unique advantage.
For example, when oil prices fall, refinery margins often rise. Because it owns its own refineries, Suncor can mitigate the pain of lower pricing.
Additionally, the company owns its own pipeline network. That means it doesn’t cede profitability to a third party in order to ship its product. That’s an important advantage when profits are difficult to come by.
Given its size and integrated strategy, Suncor should outlast most of its competitors. Pure-play businesses that simply pump and sell oil won’t have the resources or diversification to survive as long.
Survival is one thing. Success is another. For the stock to surge, either demand needs to rebound or supply needs to tighten.
Will Suncor stock surge?
A stock surge will completely depend on oil markets tightening. There’s simply way too much supply versus demand right now. Let’s look at the possibilities.
On the supply side, no relief is expected. Producers keep pumping, and breakeven prices continue to fall.
“Technology continues to improve, and there are still plenty of low-cost reserves to tap, at least over the next few years,” I wrote recently. “And now, more than ever, producers are focusing their efforts on these low-cost plays.”
The demand side is similarly difficult. New waves of COVID-19 threaten additional shutdowns. Travel restrictions are keeping a lid on vehicle and plane transportation. Even worse, global oil demand may have already peaked.
BP just released a report that shocked analysts. The research found that demand will never reach 2019 levels again! That’s a decade earlier than predicted. This is just one report, but if it’s true, oil prices will face permanent pressures. That’s no good for Suncor.
No one can predict stock prices weeks or months in advance. Only long-term predictions hold much weight. When it comes to a multi-year view, the picture is uncomfortably bleak for oil.
“To be sure, Suncor will still survive, as fossil fuel demand will continue for decades to come,” I recently concluded. “But if demand is on a permanent downtrend, and supply issues persist unabated, there’s simply not much hope for fossil fuel stocks.”
