Oil prices have rebounded as major oil producers across the world announced a cut in production. Could this be the start of a new bull rally for oil stocks? Is now the right time to buy major Canadian producers such as Suncor (TSX: SU)? Here’s a closer look.
Oil rebound
Oil prices have been falling for more than half a year. After hitting a peak in June, the price of crude has plunged significantly. That’s because energy demand was lower than expected as the global economy slowed down. However, members of the Organization of the Petroleum Exporting Countries (OPEC) announced surprise cuts to production over the weekend.
Every major oil producer, from Saudi Arabia to Russia, announced a pullback in the number of barrels they expect to produce on a daily basis. That move sent the price of oil sharply higher. As of Monday, Brent Crude and West Texas Intermediate (WTI) are both trading higher than U.S.$80 per barrel.
Investors must now consider if this rally can be sustained.
Long-term outlook
Despite the production cut, the outlook for oil remains mixed. Economists still expect a severe global recession this year, which means energy demand could be lower. It’s worth noting that oil production cuts have often preceded economic downturns. OPEC cut back production shortly before the 2008 crash as well.
Put simply, no one can predict the price of oil. But investors can estimate the value of energy stocks like Suncor assuming a broad range of prices.
Suncor’s valuation
Suncor stock currently trades at 6.8 times earnings per share. It was up 5.6% on Monday after the OPEC+ production cuts were announced, indicating that investors believe this move is a tailwind for the company.
Investor Eric Nuttall, an energy expert, believes the oil industry in Canada could deliver cash return yields (dividends + buybacks) of 11.1% on average. He believes that Suncor’s returns could be higher than most of its peers at 17% even if the price of WTI is just U.S.$70 per barrel.
Put simply, investors can expect Suncor to deliver tremendous returns even if the price of crude remains range bound for the foreseeable future. At the moment, the stock offers a sizable 4.7% dividend yield.
Meanwhile, Suncor’s new chief executive officer Richard Kruger is making strategic moves to enhance the company’s value. He has already implemented new policies to make the company’s drilling sites more secure – a major concern for investors. He has also offloaded some non-core renewable assets to streamline the business and potentially make it more profitable.
These new initiatives could take some time to be fully reflected on Suncor’s bottom line and stock price. For now, the stock remains undervalued. Investors seeking a robust source of passive income should add Suncor to their watch list.
