Suncor (TSX:SU) is down considerably over the past year and has trailed its TSX peers in the post-pandemic recovery. Contrarian investors with a bullish view on oil prices are wondering if SU stock is now undervalued and good to buy for a portfolio focused on dividends and total returns.
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Suncor stock price
Suncor trades near $40 per share at the time of writing. That’s a lot higher than the 2020 low around $15 but relatively unchanged from where the stock sat in early 2020 before the crash.
Major competitors in the oil sands have enjoyed gains as high as 100% above their early 2020 prices, so Suncor has some work to do to regain investor confidence. This is one reason the board brought in a new chief executive officer this year who is focused on driving better investor returns.
Suncor recently announced plans to cut 1,500 positions as part of this process. The company has already made good progress in reducing debt over the past couple of years, and excess cash has gone towards share buybacks. The board also reversed the 2020 dividend cut and has since bumped the payout up to a new all-time high.
At the time of writing, Suncor offers a 5.2% dividend yield.
Oil market outlook
West Texas Intermediate oil trades near US$72 per barrel right now. That’s down from the 2020 highs above US$120. Traders are trying to figure out if OPEC’s (the Organization of Petroleum Exporting Countries) supply cuts are going to be enough to offset concerns that demand could slide if the global economy goes into a meaningful recession.
Oil producers slashed capital investments during 2020 and 2021 to preserve cash. The implication over the medium term is that the industry has limited capacity to boost output in a meaningful way to accommodate a surge in demand. An economic downturn could slow the pace of oil consumption growth, but fuel demand is on the rise. Corporations around the globe are calling employees back to the office. This means millions of workers are hitting the highways again for two or three days per week. Many people are choosing to drive when they previously used public transit.
Airlines are placing large orders for new planes to meet a rebound in bookings for air travel. As a result, jet fuel demand is expected to grow over the next few years. Business travel is starting to recover and holiday travel is booming.
Ongoing volatility should be expected in the oil market, but it wouldn’t be a surprise if the bulls get the upper hand in the coming months. Oil might not jump back to US$100 in 2023, but a move up to US$80 or $85 is a reasonable outcome with additional gains possible next year.
Is Suncor stock now a buy?
Suncor looks cheap today at current oil prices and investors get paid well to wait for the rebound. If you are an oil bull and can handle some turbulence Suncor stock might be an attractive contrarian pick right now for a portfolio targeting decent dividend yields and a shot at some nice upside on a rebound.
