Canadian oil sands giant Suncor Energy (TSX:SU) continues to lag its peers. It has lost 10% in the last 12 months and has gained a mere 86% in the last three years. That’s quite an underperformance when the sector is seeing secular tailwinds. In comparison, TSX energy names have lost 5% since last year but returned a decent 235% in the last three years.
Suncor Energy stock continues to underperform
Suncor Energy has largely been the long-term laggard due to its operational issues. The second-biggest energy producer by market cap will release its first-quarter earnings on May 8. It will be interesting to see if its upcoming first-quarter (Q1) 2023 earnings provide any respite to its stock and investors.
Suncor Energy aims to produce 755,000 barrels of oil equivalent per day this year. However, we might see an update on this in its quarterly release, given the company’s recent acquisition of Canadian assets from TotalEnergies.
According to analysts’ estimates, Suncor Energy is expected to report earnings of $1.32 per share for the quarter that ended on March 31, 2023. That’s a decline from its year-ago earnings per share of $1.92. A lower oil price compared to last year will likely weigh on its financial growth.
Suncor Energy agreed to acquire the remaining 31% working interest in the Fort Hills oil sands and Surmont projects. This will add 135,000 barrels of oil per day production capacity. The transaction is valued at $5.5 billion and will be completed in Q3 2023.
Balance sheet and capital return framework
The transaction is expected to be financed with Suncor Energy’s cash and debt. So, this will likely send its net debt beyond $15 billion. Energy production companies have been aggressively repaying debt since late 2021 as a part of their capital discipline program. The transaction is expected to push Suncor a step back on the deleveraging front. However, its return-of-capital program remains in place.
Before the acquisition, Suncor Energy had planned to allocate 75% of its free cash to shareholder returns when its net debt falls below $12 billion. However, as the debt is expected to surge with this acquisition, the next phase of the capital return framework may get delayed.
Suncor Energy currently distributes 50% of its excess cash via share buybacks and dividends. At the end of Q4 2022, it had net debt of $14 billion and a leverage ratio of 0.6. Also, note that Suncor bought back 8% of its outstanding shares last year.
Higher inflation will likely boost operating expenses for the quarter, negatively impacting Suncor Energy’s margins. So, we might see some moderation in earnings growth and margins this year. However, higher production and historically higher oil prices will likely fuel handsome free cash flows this year.
Valuation and conclusion
Suncor Energy stock trades six times its 2023 earnings and free cash flows. In comparison, the industry average valuation is at seven times. So, SU stock is trading at a discount. It currently trades at a dividend yield of 5.2%, which is higher than peer bigwigs.
Suncor Energy’s oil sands asset base will likely further strengthen with its recent acquisition, but it will also delay the allocation of higher cash to shareholder returns. This could weigh on its stock in the short to medium term. Its operational issues, like refinery downtimes and worker deaths, could continue to concern investors. Given the underperformance compared to its peers and increasing debt, Suncor’s lower multiple looks justified.
