Suncor (TSX:SU) is up 24% so far in 2024. Investors who are bullish on oil are wondering if SU stock (TSX:SU) is undervalued right now and good to buy for a portfolio focused on dividends and total returns.
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Suncor stock
Suncor trades near $53 per share at the time of writing. Investors who bought the 12-month low around $40 late last year are already sitting on some nice gains. The share price is now off the August high near $57.
Suncor fell out of favour with investors in 2020 when management slashed the dividend to preserve cash until there was more clarity on the outcome of the oil market through the pandemic. The board has since raised the dividend numerous times to a level that is above that offered before the cut, but the stock has struggled to regain the market’s confidence.
Suncor brought in a new CEO in the spring of 2023. Since then, the company has trimmed staff and sold off its renewables business to focus on the core oil sands operations. Suncor also increased its stake in the Fort Hills oil sands assets.
The opening of the Trans Mountain pipeline expansion earlier this year added 590,000 barrels per day of new capacity to help Canadian producers send their product to international buyers through the export facility on the coast of British Columbia. This is a long-term positive for Suncor as it should enable the company to get better pricing on the oil and provides additional capacity to absorb production increases.
Suncor also has large refineries and a network of retail locations that operate under the Petro-Canada brand. The diversified operations all along the value chain historically attracted investors to Suncor. When oil prices fall, the downstream businesses can help offset the lower production margins. Suncor decided to keep all three divisions after a strategic review, but that could potentially be revisited at some point with an eye to unlock value for investors through the monetization of the retail business.
Dividend
Investors who buy Suncor stock at the current level can get a dividend yield of 4.1%. The size of future increases will depend on production growth, oil prices, and cost reductions as the management team continues to drive more efficiency in the overall business.
Should you buy now?
Oil prices have been under pressure in recent months, even as geopolitical risks rise. Analysts broadly expect surplus conditions next year due to weak demand in China and higher production in Canada, the United States, and other countries. Barring any major supply disruptions due to conflicts in the Middle East, the near-term outlook for oil prices is likely weak.
A major disruption in oil supply, however, could easily send oil prices soaring. In the case where the situation extends for some time, oil stocks, including Suncor, would likely catch a new tailwind.
Oil bulls might want to take a half position and look to add on weakness. The dividend pays you reasonably well to ride out turbulence. Investors with a negative view on oil demand and prices in the coming years should probably look for other opportunities.
