The easing of restrictions has improved economic activities, driving oil demand faster than oil producers could increase their output. The shortage of coal, electricity and natural gas has also contributed to a surge in crude oil prices. Notably, U.S. West Texas Intermediate (WTI) crude hit a high of $83.73 today, the highest since October 2014. Higher oil prices could benefit oil-producing companies, such as Suncor Energy (TSX:SU)(NYSE:SU), which is involved in the extraction, refining, and distribution of petroleum products.
The company’s stock price has increased by over 36% this year, outperforming the broader equity markets. Higher oil prices and improvement in its quarterly performances appear to have increased investors’ confidence, driving its stock price higher. So, let’s assess whether Suncor Energy would be a good buy at these levels.
Suncor Energy’s growth drivers
There are a bunch of catalysts that can drive Suncor Energy’s financials and stock prices in the coming quarters, with higher oil prices being one of the prominent ones. Amid rising demand and supply constraints, analysts are bullish on oil and expect it to increase further. Recently, analysts at Goldman Sachs raised their forecast for Brent crude to $90 per barrel, up from $80. Meanwhile, Bank of America Global Research expects oil prices to reach $100 per barrel in case of a severe winter.
The long-term outlook for the oil & gas sector also looks healthy. The U.S. Energy Information Administration (EIA) projects energy consumption to grow 50% between 2020 to 2050 in case of no significant changes in policy or technology. Liquid fuels could remain the largest source of energy consumption amid the growth in the industrial and transportation sectors.
Given its integrated business model, Suncor Energy is well-equipped to benefit from higher oil demand and prices. It has plans to spend $5 billion annually through 2025, strengthening its base business and optimizing its integrated value chain. These investments could deliver incremental free fund flows of around $2 billion by 2025. Along with these investments, higher production and refinery utilization, improvement in operating efficiency, and several cost-cutting initiatives could boost the company’s financials in the coming quarters. Also, its debt reduction and share repurchase programs augur well with its growth prospects.
Challenges for Suncor Energy
Last month, Syncrude Canada, owned by Suncor Energy, announced a 20% reduction in its production due to a mechanical disruption, which could impact its financials in the near term. Also, the rising transition to clean due to environmental concerns and the demand for emission reductions could hurt the entire oil & gas sector, including Suncor Energy. However, I believe the company’s growth prospects outweigh its headwinds providing an excellent buying opportunity.
Valuation and analysts’ recommendations
Despite the recent surge in its stock price, Suncor Energy trades at over a 30% discount from its pre-pandemic levels. Also, its valuation looks attractive, with its forward price-to-sales, and forward price-to-earnings multiples standing at 1.0 and 8.4, respectively. The company also pays quarterly dividends of $0.21 per share, with its forward yield standing at 2.9%.
Further, analysts look bullish on the stock. Of the 20 analysts that follow Suncor Energy, 14 have issued a “buy” rating, while the remaining six have given a “hold” rating. Their consensus price target stands at $37.21, representing a return potential of 27.8%.
