Why Suncor Energy (TSX:SU) Stock Lost 10% Last Week, Despite Record Profits

SU stock has gained 20%, while TSX energy stocks are sitting on decent gains of 33% for the year.

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It’s old news that the energy sector is among the very few seeing enormous growth this year. Thanks to rallying oil and gas prices, Canadian energy companies have seen record financial growth since the pandemic.

Likewise, it’s also old news that Canadian oil sands giant Suncor Energy (TSX:SU)(NYSE:SU) has been a laggard amid the recent boom. SU stock has gained 20%, while TSX energy stocks are sitting on decent gains of 33% for the year. And it’s not just about this year. Suncor Energy has been underperforming peers for the last few years.

Suncor Energy reports handsome Q2 earnings growth

SU stock lost 10% last week, despite reporting strong Q2 results. Its free cash flow jumped beyond $4 billion for the quarter that ended on June 30, 2022. This was a massive four-times jump than in the second quarter (Q2) 2021.

A strong pricing environment and Suncor’s operating performance led to such a strong increase. Suncor Energy’s production came in at 641,500 barrels per day in the second quarter compared to 615,700 barrels per day in Q2 2021.

However, despite the robust Q2 show, declining crude oil prices weighed on Suncor Energy stock. Oil has taken a considerable setback since June on rising recession fears, which would likely weigh on the energy demand. However, that has marred the entire sector. As a result, almost all TSX energy stocks have been trading weak for the last few months.

So, what’s behind Suncor Energy’s underperformance?

Suncor Energy has been facing several issues for a while. Be it the worker fatalities, lower production, or the activist investor Elliott, Suncor Energy is tackling multiple challenges.

There was all around criticism for Suncor Energy’s operational and safety issues. Worker deaths at Suncor plants have been a concerning issue for years. According to Reuters, there have been 13 fatalities since 2014 at the company’s sites.

In April this year, activist investor Elliott Management disclosed its 3.4% stake in Suncor Energy. Based on activist investors’ demands, Suncor Energy appointed three new independent directors and has taken up the divestiture of its non-core assets.

Moreover, Suncor Energy has not been with its peers regarding dividend hikes. Despite strong financial growth, the third-largest Canadian oil giant has increased shareholder payout by 12% in May 2022. It currently yields 5%. However, peers have announced multiple hikes on their regular quarterly payouts and hefty special dividends.

Note that although it has been relatively slower on the dividend hike front, the company is aggressively buying back its common stock. So far in 2022, it has bought back 88.5 million shares or $3.9 billion worth of its common stock. 

Bottom line

Suncor Energy shareholders might witness a decent value creation once Elliott-led strategic changes are done. In addition, the balance sheet could continue to strengthen with aggressive deleveraging and asset sales in the pipeline. Plus, SU is an undervalued stock compared to peers. So, if oil prices could reclaim the three-digit levels again, Suncor Energy stock could outperform in the next few quarters.

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 Vineet Kulkarni has no position in any of the stocks mentioned.

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