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Suncor Energy: Is This Stock Too Cheap to Ignore?

oil tank at night
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Suncor (TSX:SU)(NYSE:SU) is down 25% from the 2021 high. The pullback in the past few months has some investors who missed the previous rally wondering if Suncor stock is now undervalued and a good buy for their portfolios.

Suncor earnings

Suncor delivered strong financial results in Q2 2021 and made good progress on maintenance work, which should position the business for a solid performance heading into next year.

The company generated $2.36 billion in funds from operations versus $488 million in the same period last year. Operating earnings came in at $722 million compared to a loss of $1.345 billion in Q2 2020. Strong oil sands production resulted in a 6.7% increase in output, even as the company reduced some production due to planned maintenance at the Syncrude and Buzzard sites.

On the downstream operations, Suncor took advantage of the slowdown in fuel demand to complete maintenance work at its refineries. This should support strong utilization in the back half of the year. Canadian gasoline and diesel fuel demand is improving as the economy reopens. In fact, demand was estimated to be 13% below 2019 numbers in Q2, and the gap likely closed to just 6% in July. The full Q3 and Q4 reports should indicate additional improvements.

This is important for Suncor, which has large refining operations as well as roughly 1,500 Petro-Canada retail locations.

ESG initiatives

Suncor and a handful of other large Canadian oil sands producers recently formed an ESG alliance to work together with the federal and Alberta governments to meet their 2050 goal of net-zero emissions from oil sands operations.

The move makes sense with the sector under pressure to reduce emissions and progress on the initiative could start to attract investors who have shunned the energy companies in the past couple of years.

Dividends

Suncor cut its dividend by 55% last year when it realized the pandemic crash would hit all three of its business units. The decision surprised investors who had held the stock for several years and always received an annual dividend boost, even during challenging times.

Suncor’s share price has lagged its peers this year, especially those that maintained the payouts in 2020 and increased the dividends in 2021.

The board decided to use excess cash in 2021 to pay down debt and repurchase stock, rather than increase the payout. Investors could see a big hike in the dividend next year, assuming oil prices hold the 2021 gains. It would make sense for the board to start replacing the 2020 distribution cut to entice investors back to the stock.

Oil outlook

WTI oil rallied from US$36 last fall to a 2021 high around US$76 before pulling back to the current price near US$68 per barrel. This is still a very profitable level for Suncor. Oil bulls see the dip as temporary.

Oil bears say the spread of the Delta variant of COVID-19 could slow down the recovery in fuel demand are warranted. This is valid, but the medium-term outlook for the oil market should be positive. Commuters will likely hit the highways again in large numbers in 2022 and at least one survey suggests the roads might be more congested than before the pandemic, as more people plan to drive rather than take public transport.

Oil bulls point to the risk of supplies getting tight, even as OPEC and other producers ramp up output. Energy companies slashed exploration and development expenses by tens of billions of dollars last year. This could result in a supply squeeze in the next few years if oil demand jumps more than expected and the industry can’t keep up.

Should you buy Suncor now?

Suncor trades neat $23.30 at the time of writing and provides a 3.6% dividend yield. The stock topped $31 earlier this year and traded around $44 before the pandemic when oil actually traded lower than its current price.

Volatility should be expected in the next few months, but Suncor stock looks cheap right now. A generous dividend hike should be on the way next year, and it wouldn’t be a surprise to see the share price retest the 2021 high in the first half of 2022.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker owns shares of Suncor.

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