Shares of integrated energy firm Suncor Energy (TSX:SU)(NYSE:SU) can’t seem to catch a break these days. The stock tanked more than 4.5% on Tuesday, as the post-Jackson Hole market selloff continued. Undoubtedly, oil took a bit of a hit to the chin, now back at US$91 and change per barrel.
Even with a recession or economic “pain” in the cards at the hand of inflation-fighting interest rate hikes, Suncor and many other well-run players in the Albertan oil patch have plenty of cash-rich days ahead.
In prior pieces, I’ve noted that Canadian crude was likely to continue trading at a discount to West Texas Intermediate (WTI). Further, Suncor was also a name trading at a discount to the basket of Canadian producers.
With a discount on top of a discount, it’s not a mystery as to why Suncor Energy stock is a terrific contrarian play for deep-value investors who are more than willing to put up with what is sure to be a choppy rest of the year.
Activists could inspire positive change
Arguably, Suncor deserves to trade at a discount to some of its peers in the Albertan oil patch. Its safety track record came under scrutiny of late, thanks in part to activist investors at Elliot Investment Management.
Though the safety concerns and other addressable issues are solvable without causing disruption to operations, questions linger as to whether or not Suncor stock can close the gap with some of its peers in the oil patch.
In a prior piece, I’d argued that Suncor, with its new managers, is more than capable of pulling it off in an effort to improve the lives of its employees as well as creating a bit more value for its shareholders.
Recently, Suncor hiked its capital expenditure budget to $4.9-5.2 billion from $4.7 billion. Management cited inflation and efforts to improve reliability and safety. Amid the energy windfall, such capex hikes are encouraging. Spending more to address shortcomings is no guarantee that things will improve. However, with activist pressure, new people in the c-suite, and industry tailwinds at its back, things are looking up for Suncor.
What if safety efforts don’t pay off?
Let’s consider the bear-case scenario that sees Suncor’s safety solutions program doesn’t deliver results that appease Elliot Investment Management. In such a case, it’s hard to imagine the stock trading any lower than where it’s at right now. At writing, the stock trades at 6.5 times trailing price-to-earnings (P/E). There’s cheap, there’s dirt cheap, and then there’s Suncor’s level of cheap.
No, Suncor isn’t perfect, but it’s taking the right steps at a time when energy prices could remain above US$80-90 over the long haul. Indeed, a recession would weigh on energy demand, but not to the extent many bears may be calling for.
At the end of the day, Suncor’s spectacular balance sheet (30.4% debt-to-capital ratio, well below industry averages) and stable integrated operating cash flow stream will allow it the flexibility to reinvest while continuing to reward investors through thick and thin.
A choppier ride
With a 1.75 beta, Suncor stock is likely to be a far choppier ride than the broader TSX Index. With a volatility storm likely ahead, one may look to reduce beta (or volatility) in their portfolios. However, longer-term thinkers looking for the deepest value possible shouldn’t pay too much merit to Suncor’s extreme choppiness.
To put it simply, Suncor is a great bargain, but only for those willing to put up with the bumps in the road. Fortunately, there’s a growing 4.4% yield to collect while you wait for Suncor’s new managers to right the sails.
