Suncor Stock Fell 7.4% in November: Is it a Buy Today?

Suncor (TSX:SU) is undervalued, but not appealing enough.

| More on:
energy industry

Image source: Getty Images

Energy stocks have had an interesting journey this year. A global supply shortage was accentuated by Russia’s invasion of Ukraine. That’s created a windfall for Canadian oil and gas producers. 

Suncor (TSX:SU), one of the largest oil companies in the country, has benefited from higher energy prices. However, the oil stock has lagged behind the rest of the energy sector. It’s down 7.4% in November. Is this oil giant a buy today? 

Oil price

Energy stocks are heavily correlated with crude oil and natural gas prices. Most energy stocks have surged this year, as the price of West Texas Intermediate (WTI) skyrocketed from US$76 to US$122 in the first half of 2022. Since then, the price has gradually declined to US$79.9. 

Last week, member countries of the G7 and European Union bloc of nations agreed to a price cap on Russian crude. The cap is set at US$60 and goes into effect this year. If successful, this strategy could drag the price of crude lower.

However, analysts believe most Canadian energy producers are profitable, even if the underlying commodity is cheaper. Suncor could produce a free cash flow yield of up to 13% if the price of WTI hits US$70, according to an analysis by Eric Nuttall. That’s a better yield than most of the stock market. 

Suncor stock valuation

Suncor stock is arguably undervalued. But so is the rest of the industry. Suncor trades at a price-to-earnings (P/E) ratio of 7.8 and a price-to-free cash flow ratio of 6.4. It has managed to significantly reduce debt and boost dividend payouts this year. The dividend yield is 4.8%. 

It’s an attractive target for investors seeking value. However, the rest of the oil sector looks more appealing. Other large-cap oil producers offer dividend yields of 6-8%. Meanwhile, smaller energy producers are trading at lower valuations. Baytex Energy, for instance, trades at a P/E ratio of just 3.6. 

Suncor has also been reluctant to undertake strategic changes that would unlock shareholder value. Last week, the company decided to retain its retail energy business because it couldn’t find a buyer with the right offer. A successful sale of this unit would have unlocked between $3.8 billion to $5.7 billion of cash for shareholders. 

Put simply, Suncor isn’t the most attractive target in the energy sector. Investors have better alternatives. 

Bottom line

The steady decline in oil prices has put pressure on Suncor stock. The stock is undervalued, even if oil prices drift lower in the months ahead. However, the rest of the energy sector is much more attractive. Investors can find better value and higher dividend yields elsewhere. That’s why Suncor isn’t an appealing purchase right now. 

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.

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

More on Energy Stocks

A bull and bear face off.
Energy Stocks

2 Top TSX Energy Stocks to Buy as Crude Oil Is Set to Soar Higher

TSX energy stocks might keep topping charts in 2023 as well.

Read more »

Oil pumps against sunset
Energy Stocks

Is the Oil Boom Over?

The energy boom is over but dividend stocks like ARC Resources (TSX:ARX) are still attractive.

Read more »

Road signs rerouting traffic
Energy Stocks

2 High-Yield Energy Stocks I’d Buy and 1 I’d Avoid

I would buy energy stocks like Enbridge Inc (TSX:ENB) this year.

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Friday, January 27

The TSX Composite is on track to close the fourth consecutive week on a positive note.

Read more »

Solar panels and windmills
Energy Stocks

Algonquin Stock Has Broken Investors’ Hearts, but I Think It Will Turn a Corner

AQN stock faces more uncertainty in 2023, but could be a compelling value pickup for income investors.

Read more »

energy industry
Energy Stocks

2 Top Energy Stocks to Buy Right Now

These energy companies remain immune to the economic and commodity down cycles.

Read more »

green power renewable energy
Energy Stocks

The 1 Dividend Stock Every Retiree Should Buy for Passive Income

Here's why I think Fortis is one top dividend stock that isn't getting the kind of love it deserves from…

Read more »

energy industry
Energy Stocks

Missed Out on Canadian Energy Stocks? My Best Dividend Stock to Buy and Hold

Altagas stock is my best stock to buy to get in on the Canadian energy stock rally, and a dividend…

Read more »