Suncor Energy (TSX:SU) is among the largest companies in Canada. With a market cap of $68.8 billion and an enterprise value of $82 billion, Suncor is an integrated energy giant. It focuses on developing petroleum resource basins in Canada’s Athabasca oil sands.
Suncor explores, acquires, develops, transports, refines, and markets crude oil in Canada and other international markets. The company’s business segments include:
- Oil Sands – It recovers bitumen from mining and in situ operations and upgrades it into refinery feedstock and diesel fuel.
- Exploration and Production – The segment is involved in offshore operations off the east coast of Canada and in the North Sea while operating onshore assets in Libya and Syria.
- Refining and Marketing – The business refines crude oil into other petroleum products and markets them to retail, commercial, and industrial customers.
In the last 20 years, Suncor Energy has returned 150% to shareholders. However, after adjusting for dividend reinvestments, cumulative returns are closer to 310%. Comparatively, the TSX Index has given more than 400% to shareholders in dividend-adjusted gains since October 2004.
Let’s see if Suncor Energy stock can outpace the TSX Index going forward.
A strong performance in Q2 2024
Suncor Energy reported adjusted funds from operations of $3.4 billion or $2.65 per share in the June quarter. In the last two quarters, its adjusted funds from operation totalled $6.6 billion, or $5.11 per share. The company’s focus on cost optimization allowed Suncor Energy to reduce its operating expenses by $250 million to $3.2 billion in Q2.
Suncor reported free funds flow of $1.4 billion, or $1.05 per share in Q2, translating to a payout ratio of 52%, given its quarterly dividend of $0.545 per share. In Q2, Suncor paid shareholders $698 million in dividends and $825 million in share buybacks. In the first half of 2024, it has returned $2.5 billion to shareholders via dividends and buybacks.
The Canadian energy heavyweight also uses free cash flow to lower balance sheet debt. For instance, its net debt has reduced by $500 million in the last three months to $9.1 billion.
What next for Suncor Energy stock?
In the last two quarters, Suncor Energy’s refining throughput rose by 62,000 barrels a day to 430,000 barrels a day, up 16% year over year. It was the best half in Suncor’s history due to a 95% utilization rate, up from just 82% in the year-ago period. Moreover, upstream production rose by 61,000 barrels a day or 8% year over year since the start of 2024.
Suncor continues to invest in capital expenditures, which should help it grow cash flow, earnings, and dividends over time. It projects increasing production by 100,000 barrels per day by 2026 and growing its annual funds flow by more than $3 billion in this period.
Suncor Energy emphasized that growth within its existing assets and other expansion projects would mean it would not direct any significant capital to new bitumen development in the next five years.
Analysts expect Suncor Energy’s adjusted earnings to narrow from $5.10 per share in 2023 to $4.22 per share in 2025. Priced at 13 times forward earnings, Suncor Energy stock might seem cheap due to its tasty dividend yield. However, a challenging macro environment and narrowing earnings estimate make it a high-risk investment in October 2024.
Analysts remain bullish and expect Suncor Energy stock to gain over 10% in the next 12 months. After adjusting for dividends, total returns in the next one year may be closer to 15%.
