Suncor Energy (TSX:SU) is a Canadian oil company whose shares are in the midst of a minor correction. The stock peaked in August at $57.15 and trades for $49.92 today, meaning that it is down 12.6% from its highs. That meets the definition of a correction, which is a pullback of 10% or more.
The question investors will want to ask themselves is, “Is this pullback a buying opportunity, or is the stock justifiably beaten down?” Suncor Energy is an oil stock, and oil prices are down significantly for the year. However, the fact that oil prices are down doesn’t necessarily mean that they are going to stay down. Renewables are not yet able to replace oil, and nuclear power plants take 5 to 10 years to build (the most recent big nuclear push started in 2022). For these reasons, and because OPEC has been cutting back on supply, we can expect a reasonably healthy oil market for the medium term.
What does all this mean for Suncor Energy specifically? Any company that sells oil and gas is partially a play on the prices of those commodities; but how about Suncor’s operations? Are they well-positioned to gain from today’s oil and gas market? In this article, I will explore these various segments of Suncor’s business in order to determine whether the company is likely to thrive in the years ahead.
Crude oil
Crude oil sales is the part of Suncor Energy’s business that benefits the most from high oil prices. In the most recent quarter, Suncor’s tar sands segment brought in $7.4 billion in revenue, up 21%. Its smaller exploration and production segment brought in $673 million, down 17%. Overall revenue for the crude oil related segments was up 15.4%. These segments should do fine as long as oil prices remain above $45. Prices dropping well below $60 would probably cause the stock price to drop, but there is no immediate risk of Suncor’s crude oil business becoming unprofitable.
Gas stations
Suncor Energy’s gas station business is generally quite profitable even in periods when crude oil prices are relatively low. This business refines crude oil into gasoline and sells it at these gas stations, which allows it to capture more profit than it would through selling or refining oil alone. Suncor doesn’t break out gas station sales separately on its financial statements, but in general this is the part of Suncor’s business that depends the least on high oil prices.
Refining and marketing
Like Suncor’s gas station segment, the refining and marketing segment is somewhat less directly linked with oil prices than the crude oil segments are. It makes more money when the spread between oil and various refined prices (e.g., gasoline) is the highest, not necessarily when oil prices are highest. This segment of Suncor’s business is usually profitable and it delivered modest revenue growth last quarter.
Foolish takeaway
Taking everything above into account, I think Suncor is likely to deliver positive returns if oil prices stabilize above $70. It seems reasonably likely for that to happen over the next five years. A modestly sized position in Suncor in a well-diversified portfolio is probably not a bad idea.
