An oil bellwether broke its dividend-growth streak during the tumultuous 2020 when crude prices dropped to historically low levels. However, since the return of energy demand in 2021 and the ever-increasing commodity prices in 2022, Suncor Energy (TSX: SU)(NYSE: SU) has regained the trust and confidence of investors.
The oil sands king received an upgrade recently from no less than RBC Capital Markets. According to economist Greg Pardy, Suncor is regaining its best-in-class status and, therefore, deserves an outperform or buy rating. Despite the brutal market selloff last week, the energy stock is up 50.7% year to date.
Price forecasts
As of June 20, 2022, Suncor is outperforming the broader market (-9.66%) and the energy sector (+45.22%). Based on Pardy’s forecast, the price could climb 13.34% to $53 in 12 months. However, other market analysts covering the oil stock predict a higher climb of 18.41%. If you invest today, the dividend yield is 4.20%.
Incredible comeback
In 2020, Suncor incurred a net loss of $4.31 billion compared to the $2.89 billion net income in 2019. Management took significant steps during the year, including the slashing of dividends by 55%, to preserve the financial health of the company. It also implemented meaningful operating cost and capital-reduction targets.
Suncor made an incredible comeback in 2021, as net earnings reached $4.11 billion. In Q4 2021 alone, cash flow provided by operating activities soared 221.25% to $2.61 billion versus Q4 2020. Also, the $3.1 billion adjusted funds from operations were the highest ever in a quarter for Suncor.
Mark Little, Suncor’s president and CEO, said, “In the fourth quarter of 2021, we achieved combined upgrader utilization of 96%, maximizing the value of our barrels, and continued to deliver industry-leading downstream refinery utilizations of 96%.”
The good news
According to Little, the increased cash flows in 2021 enabled Suncor to exceed its shareholder return targets for the year. Apart from increasing the payouts, the company accelerated share repurchases and debt payments. After reporting its Q1 2022 results, managed announced a 12% dividend hike, the highest percentage increase in quarterly dividends.
The $4.1 billion adjusted funds flow from operations erased the record established in Q4 2021. Apart from repurchasing $827 million worth of shares and paying $601 million in dividends, Suncor reduced its debt by $728 million during the quarter. In the same quarter, net earnings jumped 259.2% to $2.95 billion versus Q1 2021.
Suncor intends to maximize value through its core business. The planned divestment of its Exploration & Production (E&P) assets in Norway is one of the steps to optimize its asset portfolio.
Restored reputation
The $66 billion an integrated energy company is flush with cash and benefits greatly from surging commodity prices. RBC Capital Markets’s Pardy estimates Suncor to have around $14.7 billion in free cash flow under his baseline commodity-price expectations by year-end 2022.
Pardy is encouraged by Suncor’s tight grip on the steps required to regain its status as a best-in-class oil sands operator. Management had to risk damaging its reputation in 2020, but the moves it made to restore it have paid off handsomely.
