Suncor (TSX:SU) just reported second-quarter (Q2) 2023 earnings and announced a major overhaul of the senior leadership team. Contrarian investors are now wondering if SU stock remains undervalued, and it’s good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Suncor Q2 2023 earnings
Suncor generated adjusted operating earnings of $1.25 billion in Q2 2023 compared to $1.81 billion in Q1 and $3.8 billion in Q2 2022. Cash flow from operations came in at $2.8 billion compared to $4.23 billion in the same period last year.
The big drop is largely due to the decline in oil prices. West Texas Intermediate oil topped US$120 per barrel in the second quarter of 2022. This year, the price was largely in the US$70 to US$80 range.
Total upstream production actually rose to 741,900 barrels of oil equivalent per day (boe/d) compared to 720,200 in the same period last year. Refinery utilization was 85%, up from 84% in the second quarter of 2022. Total oil sands production was 679,100 boe/d, up from 641,500 in Q2 last year.
During the quarter, Suncor continued its strategic overhaul led by the new chief executive officer. The company sold its assets in the United Kingdom for gross proceeds of $1.1 billion. In addition, Suncor just announced the retirement of three senior executives. New people will take over in the roles of chief financial officer, executive vice president of oil sands, and executive vice president of downstream. Four other senior positions will have new faces.
Is Suncor stock undervalued?
Suncor trades near $42 per share at the time of writing. That’s up from the 12-month low around $36 but down considerably from the $53 it hit in June last year. The stock price is now close to where it was before the onset of the pandemic. Oil sands peers, however, have enjoyed gains of as much as 100%, so Suncor has some ground to cover to catch up to the other major producers.
Investors need to be patient as it will take some time to turn Suncor around, but the company seems to be making progress.
Management took advantage of higher oil prices in 2021 and 2022 to shore up the balance sheet and buy back stock. The company also sold its solar and wind assets last year. Suncor is reducing staff by about 20% or 1,500 positions across the business by the end of this year to cut expenses.
Investors will have to be content to get paid a decent dividend while they wait for the effects to show up in the numbers. Suncor has increased the quarterly dividend to a new high of $0.52 per share after slashing the payout by 55% in 2020 when the pandemic lockdowns triggered a collapse in oil demand.
The company’s integrated business structure used to be a reason to buy the stock, and that could be the case as the world bounces back from the pandemic. In normal times when oil prices decline, Suncor’s refineries and retail operations can benefit from lower input costs and higher demand. This typically helps offset the drop in upstream revenues. Fuel demand is expected to be strong in the coming years, as airlines ramp up capacity and commuters increasingly return to the office.
The bottom line
Ongoing volatility should be expected, but Suncor has decent upside potential if the new boss succeeds in revitalizing the company.
Investors who are bullish on the oil market can now get a 4.9% dividend yield from Suncor while they wait for the recovery. If you are willing to ride out ongoing turbulence in the energy sector and think oil prices are headed back to US$100 in the next couple of years, this might be a good time to start nibbling on Suncor stock.
