This year has been a one to forget for the oil industry. Oil stocks have suffered through the year but there is finally some light as the much-talked-about rebound in crude oil prices is finally starting to materialize. Does this make Canadian oil giants such as Suncor Energy (TSX:SU)(NYSE:SU) a good bet for 2021 and beyond?
Optimism about oil prices should benefit Suncor
Suncor is one of the biggest names in the Canadian oil sector and the stock lost nearly 70% of its value in the first quarter of 2020. However, in the last two months, it has surged over 40%.
A major reason for the volatility in the oil industry has been the extreme fluctuations in oil prices. However, recent West Texas Intermediate (WTI) and Brent oil prices have stabilized since the rollout of COVID vaccines and are at the highest levels in the last ten months.
WTI is currently at $48 levels. This is already higher than the expected average price of 2021. Despite the fact that major economies like the U.S., Canada, and Europe are facing a rise in COVID cases and a second round of lockdowns, WTI oil prices have surged 35%.
As per the International Energy Agency’s (IEA) latest report, oil demand is likely to remain bleak for some more time because of the stressed airline industry. This also suggests global economic recovery will be delayed in 2021. While countries like China and India have already started showing signs of recovery, the rest of the world will take time to catch up.
Finally, since the current crude oil prices have exceeded IEA’s 2021 expectations, we can be a little more optimistic about the oil market.
Will 2021 be different for Suncor?
Positive changes have been noticed in Suncor’s financial statements. Funds from operations rose by almost 140% to $1.166 billion from $488 million in Q2. Operating loss also reduced to $302 million from the $1.489 billion figure in the June quarter.
Gradual pickup in demand along with strict cost control measures is serving as a vaccine for Suncor Energy. The company’s continuous strive for reducing the operating, selling and general expenses will help the company’s drive to turn around in 2021. Better financials than many of its peers will give Suncor a competitive advantage to benefit from the increase in crude oil prices.
Suncor has also slashed its dividend payment to conserve cash. Quarterly dividends stood at $0.465 in early 2020 and are now at $0.21. This move still provides shareholders a yield of 3.7% today. And if things turn around in 2021, Suncor can always restore or increase its dividend payments.
The Foolish takeaway
Investing in Suncor now might involve risk but it is also evident that the company will benefit the most when the energy sector rises again. It’s no wonder that analysts have given the stock a price target of $28, an increase of almost 28% from its current levels. Suncor is a giant that has stumbled in 2020. If you move fast, you can hitch your wagon to this ride.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.