Suncor (TSX: SU) used to be the go-to stock in the Canadian energy sector, but the former market leader is out of favour with investors after a string of safety and performance issues in addition to the recent cyber attack.
Oil bulls with a contrarian investing style are wondering if Suncor is now oversold and a good stock to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Oil market outlook
West Texas Intermediate oil trades for close to US$74 per barrel at the time of writing. This is off the 2023 trading low of around US$65 but still way down from more than US$120 at the high last year.
Oil bears have enjoyed the upper hand over most of the past 12 months. Rising recession fears in major consumption markets are keeping prices in a tight range. Central banks around the globe are trying to get inflation under control. The popular tool to achieve the goal is higher interest rates that are designed to cool off the hot post-pandemic economy and bring the labour market back into balance.
Economists say rate hikes normally take 12-18 months to have a visible impact on the economy. As such, there is a risk that the central banks will drive rates too high and keep them elevated for too long. In the worst-case scenario, the result is a deep recession. Ideally, central banks hope to deliver a soft landing for the economy as inflation pulls back to target rates.
A global downturn would potentially slow the recovery in fuel demand. Another headwind for oil prices is the ongoing weakness in China’s economy, despite the reopening of the country after the extended pandemic lockdowns. China is a major oil consumer, and a rebounding Chinese economy is viewed as necessary for a new rally in oil prices.
Finally, bears point to failed attempts by the Organization of Petroleum Exporting Countries to boost prices through supply cuts. The consortium has historically been able to influence the market by adjusting output.
Bulls see the rebound in air travel and the return to offices by millions of commuters as the basis for optimism in the oil market. Regarding supply, global producers cut capital budgets by hundreds of billions of dollars during 2020 and 2021. Getting new oil production facilities up and running takes a long time, and it could be years before investments can replace drained reserves. At the same time, pressure to reduce carbon emissions is driving oil executives to return excess cash to investors instead of investing the funds in large new projects.
Is Suncor stock a buy?
Suncor has underperformed its peers through the post-pandemic recovery. In fact, Suncor trades near $38 per share at the time of writing compared to around $40 before the 2020 crash.
Other oil sands majors have enjoyed gains of up to 100% over the same timeframe.
Suncor has a new chief executive officer this year who is determined to get the company back on track. Job cuts are already underway to streamline the business, but it will take some time for operational improvements to materialize. Investors shouldn’t expect big returns over a short period of time, but Suncor currently offers an attractive 5.5% dividend yield, so you get paid well to wait for the rebound.
You need to be an oil bull to buy the stock. If you are in that camp, Suncor probably deserves to be on your radar near this level.
