Oil prices are starting to rebound as traders weigh increasing geopolitical risks. Investors who missed the previous rally in TSX oil stocks are wondering if Suncor Energy (TSX: SU) is undervalued and good to buy right now for a portfolio focused on dividends and total returns.
Suncor stock
Suncor trades near $53 at the time of writing compared to $49 a few days ago. For the year, SU stock is up about 24%.
Suncor fell out of favour with investors in recent years due to operational challenges and a string of safety issues at its facilities. The new chief executive officer who took over in 2023 has made good progress on cutting costs and driving efficiency into the business. A rebound in the price of West Texas Intermediate oil to about US$90 around this time last year also helped and led to a nice recovery in Suncor’s share price. The stock rallied from below $40 in June last year to the 12-month high of around $57.
The price of WTI at the time of writing is US$73. It was as low as US$67 in recent days before the latest surge in tensions between Israel and Iran.
Traders are concerned that Iran might block the Straits of Hormuz, a narrow waterway gap between Iran and Oman where oil tankers need to pass to access global markets. Nearly 90% of oil produced in the Persian Gulf is shipped through this passage, representing 20-30% of global oil consumption, according to analysts.
Another risk is that Israel could target Iranian oil infrastructure as part of its retaliation for Iran’s recent launch of missiles at Israel. In addition, an escalation of the current conflict could drag the entire Middle East into a war, further threatening oil supplies.
In a scenario where oil prices spike and markets believe they will stay elevated, Suncor’s share price could soar. The recent opening of the Trans Mountain pipeline in Western Canada gives Suncor and its peers important new access to global buyers via the coast of British Columbia.
Risks
A slowing global economy and weak oil demand from China, along with ample supplies coming from global producers, led to the slide in oil prices over the past six months. Geopolitical activity often only leads to short-term moves in the price of oil. If things start to calm down between Iran and Israel in the coming weeks, oil prices could retreat back below US$70 as traders once again focus on consumption and supply.
Dividend
Suncor upset investors in 2020 when it slashed the dividend at the outset of the pandemic. The company has since raised the dividend to above the previous level. Suncor bumped up the payout by 5% for 2024. At the current share price, the distribution provides a 4% yield.
Time to buy Suncor?
Management is making good progress on the turnaround plan, and the opening of Trans Mountain bodes well for Canadian oil sands producers going forward. If you think the price of oil is headed higher through next year and will stay elevated, Suncor is probably attractive at this price.
Investors who are concerned that a global economic slowdown and abundant oil supplies will offset geopolitical threats might want to look for other options in the market to put money to work.
