Suncor (TSX:SU)(NYSE:SU) is starting 2022 with some nice gains, and investors who missed the recent rally are wondering if Suncor stock is still undervalued and a good buy today for a TFSA or RRSP portfolio.
Oil price outlook
WTI oil is back to US$80 per barrel at the time of writing. The rally from $65 in early December has put a new tailwind behind energy stocks, and more gains could be on the way.
Strong demand driven by the global economic rebound is expected to continue, as Omicron fears start to recede. At the same time, supply disruptions in Libya and civil unrest in OPEC member Kazakhstan are pushing traders to make bullish bets on oil, even after OPEC recently indicated it will look to increase supply due to tightening market conditions. The consortium is scheduled to increase supply by 400,000 barrels per day in February. Some analysts, however, are of the opinion that the group will have trouble hitting that target.
One unknown is the potential return of oil from Iran. Discussions are ongoing to possibly lift sanctions against the country. In the event a deal is reached, Iran could add enough new supply to the global market to put new downward pressure on oil prices.
That being said, oil bulls are now calling for a potential run to US$100 per barrel. Oil might not stay at that level for very long if it gets there, but it could stabilize in the US$75-$85 range for the next few years. This is a very profitable price for Suncor and the market might not yet appreciate the cash flow potential.
Suncor’s earnings
Suncor reported strong Q3 2021 results, and the Q4 numbers will likely be solid as well. Funds from operations came in at $2.64 billion in the quarter, supported by strong results in the downstream refining and retail operations as well as in the production business.
Operating earnings topped $1.04 billion in the quarter compared to a loss of $338 million in Q3 2020. Suncor reduced net debt by $2 billion in Q3 bringing the total for the first nine month of the year to $3.1 billion.
At the end of Q3, Suncor had already repurchased 4.1% of the outstanding stock since February, and the board subsequently increased the program to enable the company to buy back up to 7% of the outstanding shares.
Suncor’s dividend
Suncor cut its dividend by 55% in 2020 to protect cash flow amid the uncertainty of the pandemic. The move upset long-term shareholders who relied on Suncor for its steady dividend payments.
The company used most of the excess cash to buy back stock and reduce debt in 2021, setting the stage for the big dividend increase that was announced with the Q3 earnings report. Suncor raised the distribution by 100% to bring the payout back to the 2019 level.
It wouldn’t be a surprise to see another dividend increase in the first half of 2022. The current payout provides a 4.9% yield.
How high could Suncor stock go?
Suncor trades near $34 per share at the time of writing. The stock was at $44 before the pandemic. Oil prices are much higher now than they were in early 2020 and fuel demand has recovered most of the pandemic losses. With oil back at US$80 per barrel, the stock appears cheap today.
Assuming oil stays around an average price of US$75 and fuel demand continues its recovery, Suncor stock could easily top $40 by the end of the year or even hit $50 if another large dividend increase is announced in the coming months.
