Why Suncor Energy Stock Could Lose its Underperformer Tag Soon

So far this year, SU stock has gained 21%, while TSX energy stocks at large have gained 38%.

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Suncor Energy (TSX:SU)(NYSE:SU) is Canada’s largest oil sands producer and is the biggest integrated energy company. However, it has been notably underperforming peers for the last few years.

So far this year, SU stock has gained 21%, while TSX energy stocks at large have gained 38%. Suncor’s underperformance could be worrisome for its shareholders, as the entire sector has seen a positive change since the pandemic due to the super-high price environment.

Suncor Energy stock could change course soon

Suncor Energy, too, saw significant earnings growth in the last few quarters like peers. However, issues like lower production and worker deaths have weighed on its stock performance in the last few years. Now, given the operational issues and fundamental strength, renowned activist investor Elliott Management took a stake in the oil sands operator. So, things could change for the better, and Suncor Energy stock could change course.

Let’s see how.

So far in 2022, Suncor Energy reported free cash flows of $4.9 billion, marking an incredible 215% growth from the same period in 2021. Peers also witnessed similar financial growth this year as oil prices breached US$130 per barrel in the second quarter (Q2) of 2022. And notably, energy producers massively repaid debt while also rewarding their shareholders with generous dividends. At the same time, Suncor Energy has lagged peers on the dividend-growth front and has only increased it by 12%.

However, its dividend growth could gain steam in Q4 2022 or early next year, as the company reaches its net debt target. Suncor has announced an allocation of 50% of its free cash flows to debt repayments and the rest for shareholder returns — that is, buybacks or dividends.

In Q2 2022, its net debt fell to $15.7 billion from close to $20 billion at the end of 2020. As the net debt declines below $12 billion, which is expected in the second half of this year, it will allocate 75% of its free cash flows to shareholder returns.     

Aggressive buybacks and dividend hikes

Canadian energy producer companies are aggressively repurchasing their own stock amid the recent weakness. Share buybacks enable an increase in the stock price while also conveying the management’s view that the shares are undervalued. So, the incremental free cash flows will strengthen Suncor’s balance sheet and reduce the float at the same time.   

Moreover, apart from the financial growth, Suncor will likely see billions in proceeds from the non-core assets sales. The sale of its Norway assets and a potential divestment of its downstream business are some examples. So, the proceedings will likely reduce Suncor’s debt burden. And more free cash flows will likely be available for dividends or share repurchases.

SU stock is currently trading six times its earnings and looks undervalued. It is trading at a free cash flow yield of 20%. So, SU could see a remarkable recovery from its current levels.

The Foolish takeaway

Even if oil prices have fallen substantially from their highs, they are still higher compared to last year. So, Canadian energy producers will probably continue to see steep financial growth in Q3. In a nutshell, Suncor Energy stock could outperform in the next few quarters, given the incremental allocation of its cash to shareholder returns and the proposed sale of its non-core assets.

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. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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