Oil giant Suncor Energy (TSX:SU)(NYSE:SU) has rebounded strongly over the past six months. It seems the discovery of the COVID-19 vaccine in November was the catalyst this energy company needed to regain market value. Suncor stock is now trading at $26 — the highest level its reached since the crisis erupted.
But can this energy giant regain all of its lost value? Could the stock rebound to pre-pandemic levels or even surpass it? Here’s a closer look.
With much of the global economy and international borders shut down last year, it’s no surprise that oil demand plummeted. In fact, a few weeks into our first lockdown, a barrel of crude was trading for negative value.
However, much of the global economy is set to reopen this year. By the end of 2021, oil demand could be back to pre-pandemic levels, according to analysts at S&P Global. That should mean that Suncor’s top line recovers back to 2019 levels by the end of this year.
However, Suncor’s bottom line should improve much faster. The company has been focused on reducing capital outlays and operational costs. Operating costs were slashed by $1 billion last year. Another $1.9 billion was cut from capital deployments. By 2025, the company expects to add a whopping $2 billion to free cash flow annually.
Meanwhile, technology should help the company lower costs of production. The upcoming Autonomous Haulage System and PASS tailings technology (Permanent Aquatic Storage Structure) could shave dollars off each barrel produced. In fact, the company’s breakeven price could be as low as US$35 per barrel of West Texas Intermediate (WTI). WTI currently trades at US$60.
In other words, Suncor’s profits are set to explode, even in a world with stable or lower oil consumption. The stock price hasn’t priced this in yet.
Suncor stock valuation
Suncor stock may have jumped 75% over the past six months, but it’s still trading at 12% more than book value per share. It’s also trading at a forward price-to-earnings ratio of 16.7, which implies an earnings yield of 6%. That’s excellent value for the current market.
The stock offers a lucrative 3.2% dividend yield. That steady return is likely to be sustained for the foreseeable future, which is why Suncor is the ideal dividend-growth stock for your portfolio.
Canada’s energy sector is in a precarious position. The oil market hasn’t recovered from its crash in 2015. Last year’s crisis diminished demand further. Now, low-cost producers have extensive supply, while Canadian producers struggle with infrastructure.
That’s why Suncor stock has been subdued. However, analysts expect oil demand to bounce back by the end of the year. The Suncor team, meanwhile, has slashed costs and expects to produce each barrel of oil more cheaply. In other words, profits could ascend, pushing the stock much higher.
This is what makes Suncor stock an ideal target for contrarian value investors.
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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 Vishesh Raisinghani has no position in any of the stocks mentioned.