Suncor (TSX:SU) is up in recent days on the back of a bounce in oil prices, but the stock remains out of favour among TSX energy investors who are waiting to see if new management can get the Canadian oil giant back on track.
Underperformance
Suncor trades near $42 per share at the time of writing. The stock recently dipped below $40 and was near $36 at the 12-month low in September.
Long-term investors are wondering when the stock will start to catch up to the returns the other large energy players have delivered over the past three years. Suncor’s share price is pretty much where it was in early 2020 before the pandemic compared to gains of as much as 100% for other oil sand producers.
One could argue that the decision to cut the dividend by 55% in the early days of the pandemic continues to hurt Suncor, even though the board has since increased the distribution significantly to recover the cuts and even surpass the pre-pandemic to a new high.
Suncor stock pays a quarterly distribution of $0.52 per share. That’s good for an annualized yield of just under 5% at the time of writing.
Upside?
Suncor’s new chief executive officer is expected to continue working towards improving safety at the company’s facilities and streamlining the operations through non-core asset sales. The company already sold its renewable energy assets in Canada and recently monetized offshore holdings in the United Kingdom.
A battle with an activist investor is now resolved. Suncor has also decided to retain its retail business after a strategic review concluded that shareholders are better served by keeping the integrated structure in place. Suncor owns refineries and roughly 1,500 Petro-Canada retail locations along with being a major oil producer. The company considered selling the retail division to unlock value, but that is no longer on the table.
West Texas Intermediate (WTI) oil trades near US$75 per barrel right now. That’s up from US$66 two weeks ago but still way below the US$120 it hit last year. Oil bulls say rising demand and limited scope for supply growth will drive WTI oil back toward the US$100 mark. If they are correct, Suncor looks undervalued today.
Risks?
Analysts say it will take time to turn Suncor around. Oil bears warn that a severe global recession caused by aggressive central bank rate hikes could stall the demand recovery and lead to surplus conditions in the energy market. In that scenario, Suncor could retest the 12-month low or slide even further in the event of another meaningful market correction.
Is Suncor stock cheap to buy now?
Ongoing volatility should be expected, and it wouldn’t be a surprise to see Suncor slip to $35 on weaker oil prices or another market rout caused by financial market fears. As such, I wouldn’t back up the truck if you are of the opinion that the global economy is headed for a rough ride in the next 12-18 months.
Oil bulls, however, might want to consider nibbling on the stock near $40 and look to add to the position on further weakness. The dividend should now be safe, so you get paid well to wait for the rebound.
