Oil Price Rally: Are Top Energy Stocks Like Suncor Too Cheap to Ignore?

The price of oil keeps moving higher, but some energy stocks remain out of favour. What’s going on with Suncor stock, and should investors buy the shares now?

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The price of WTI oil just topped US$60 per barrel and hit a new 12-month high. Contrarian investors with an eye for value wonder if Suncor (TSX:SU)(NYSE:SU) might be a cheap stock to buy now.

Oil price tops 2021 expectations

Oil analysts expected WTI oil to average US$50 per barrel in 2021. That could turn out to be the case by the end of the year, but the action in the first six weeks suggests the estimates might be a bit low.

The WTI oil rebound from US$36 in October caught many analysts and investors by surprise. Revised estimates based on the strength of the rally suggest oil could top US$65 in the coming months.

A surge in optimism occurred on the arrival of positive vaccine trial results. Vaccine roll-outs are now underway, and the market anticipates a strong rebound in fuel demand later this year. At the same time, OPEC+ appears committed to maintain agreed supply cuts. Saudi Arabia provided extra optimism when it announced an additional unilateral reduction of one million barrels per day for February and March.

Once global workers start heading back to the office, gasoline demand should rebound. In fact, the IEA predicts gasoline and diesel consumption will essentially return to 2019 levels by the start of 2022. China leads the way, but Europe and the United States should start to catch up by Q4 this year.

Jet fuel demand isn’t expected to rebound until 2022. New restrictions on air travel designed to minimize the international spread of new COVID variants could remain in place until the broader general public has received a vaccine. In 2022, however, the airline industry should see restrictions lift and capacity start to improve.

Is Suncor stock cheap right now?

The last time WTI oil fetched US$60 per barrel, Suncor stock traded for more than $40 per share. That’s much higher than the current price near $23.

What’s going on?

Suncor’s production assets should enjoy strong margins at the current oil price. Management expects cash operating cost on the various production assets to be $26 to $35 per barrel based on the 2021 outlook released November 30, 2020.

The market might be concerned that the downstream operations will take longer to recover. Suncor owns four large refineries and operates roughly 1,500 Petro-Canada retail locations. In normal times, these business units provide a nice buffer against dips in oil prices, but that wasn’t the case last year.

Suncor only plans to spend enough on capital projects to maintain operations this year, rather than invest heavily to boost output. Large writedowns on assets have also hurt the stock.

On the positive side, Suncor intends to repay $500 million to $1 billion in debt this year. If oil prices can hold recent gains through the coming months, the company might exceed that target.

Overall, Suncor stock appears cheap right now based on the current oil price. However, volatility should be expected. The price of oil could correct meaningfully after the huge run and hit the hot energy sector. Investors with a bullish view on oil might want to take a small contrarian position in Suncor stock near the current price and then look to add on the next pullback. The case can be made for decent upside potential once the global economy gets back on track.

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 Andrew Walker owns shares of Suncor.

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