Suncor (TSX:SU) has underperformed its TSX oil sands peers in recent years. The stock has pulled back in recent weeks amid the dip in the price of oil. Investors with a contrarian investing style are wondering if SU stock is now undervalued and good to buy for a dividend portfolio targeting income and total returns.
Suncor stock
Suncor trades near $42 per share at the time of writing. The stock was as high as $48 in March and fell below $38 at one point in June, so there has been a lot of volatility this year.
Looking back over the past five years, investors can see that Suncor’s share price has only recovered from the pandemic losses. That compares to gains of as much as 100% from early 2020 levels at some of the other major oil sands producers.
Suncor upset investors in the early weeks of the pandemic when it slashed the dividend by 55% to preserve cash flow. The board ultimately reversed the decision and has since increased the distribution to a new high. At the time of writing, Suncor provides a 5% dividend yield.
Despite the rebound in the dividend and Suncor’s efforts to shore up the balance sheet, the market still isn’t giving Suncor much love. A new chief executive officer took charge of Suncor this year, and the company is now focused on improving efficiencies and reducing operating costs to drive better returns for shareholders. Suncor cut staff this year and continues to refocus investment on the core businesses.
Suncor decided to keep its integrated structure in place after a review of the company’s operations. The oil sands segment is the largest contributor to Suncor’s revenue stream, but the company also has refineries and a network of Petro-Canada retail locations. Historically, the downstream assets provided a hedge against volatility in the commodity market. As oil prices drop, the feedstock costs for the refineries falls, as well. This can boost the margins on the refined products. Lower oil prices tend to lead to reduced prices at the pump, which often drives higher fuel demand.
The future profitability of refineries and gas stations, however, is arguably up in the air, as the government presses for a faster transition to clean energy and the reduction of greenhouse gas emissions.
Oil outlook
Some oil analysts anticipated a sustained move back to US$100 this year, supported by strong demand and anticipated tight supplies. That hasn’t been the case, although the price briefly topped US$90 in September but has since plunged. Geopolitical forces have been the main driver of spikes, rather than economic ones. This trend could continue in 2024.
The global oil market has a lot of moving parts, and the bears have been in control in recent weeks, as U.S. production continues to ramp up while traders worry that weak economic conditions in China will limit demand growth from the world’s largest oil consumer. A global recession in 2024 could drive oil prices even lower. Pundits also speculate the American government will try to keep gas prices low heading into next year’s election. That requires weak oil prices.
Bulls say the economy is headed for a soft landing next year, and anticipated interest rate cuts could kickstart investment and new economic growth. That would potentially support oil demand. At the same time, some traders suspect the U.S. will have to replenish reserves in the coming months, and this will put a floor under the oil price.
At the time of writing, West Texas Intermediate (WTI) oil trades near US$72 per barrel. Where the market is headed is anyone’s guess. A dip to US$50 for WTI is certainly possible on weakening economic conditions, while a surge above $80 could also occur as a result of another geopolitical shock in the Middle East or an improvement in global demand.
In Canada, oil companies are waiting for the completion of the Trans Mountain pipeline project to open up additional access to international markets. Recent issues, however, could potentially delay the project by up to two more years, according to the Crown Corporation that owns and is building the pipeline.
Is Suncor a buy today?
Ongoing volatility should be expected in 2024. Oil bulls might want to start nibbling at the current level and look to add to the position on additional dips. The dividend should be safe, and you get paid well to ride out some turbulence. Suncor is arguably a contrarian pick, but there is significant upside potential if oil prices move higher and the new management team is able to turn the company around.
That being said, investors who think the price of oil is headed lower in 2024 and 2025 should probably look for other high-yield opportunities in the market today.
