Suncor Energy (TSX:SU) is one of Canada’s premier energy companies. A fully integrated oil and gas company, it makes money off of crude oil, refining, and gas station sales. Suncor’s ability to make money at every step along the oil and gas supply chain distinguishes it from many other Canadian oil and gas companies. When one part of the energy business (e.g., exploration) is doing poorly, Suncor can still make money off another part that is doing fine (e.g., refining or natural gas).
Despite all the things Suncor Energy has going for it, one thing is undeniable: the company is in a commodity-related industry.
That means that its earnings and stock price are likely to be volatile going forward. While a person might look at Suncor’s earnings multiple and conclude that the stock is cheap, it will cease to be so cheap if oil prices fall and cause SU’s earnings to fall with them. In this article, I will explore the factors contributing to Suncor’s recent success and attempt to determine whether they will continue bearing fruit for the company.
Oil prices
The single biggest factor in Suncor Energy’s future results is oil prices. Suncor extracts, refines and sells crude oil and crude oil-derived products like gasoline, so naturally, it makes more money when oil prices are relatively high.
Generally speaking, the oil market has been healthier in recent years than it was in the 2015-2020 period. Supply has been held back by geopolitical tensions and OPEC cuts, while demand has increased incrementally. It is highly unlikely that we will revisit the +$120 crude prices that were common in 2022, as Russian oil is back on the market again. However, Suncor only needs about US$43 per barrel of West Texas Intermediate crude to break even. So, even if oil prices just hover around where they are now, the company should do well.
Debt reduction
Apart from fairly high oil prices, another factor that could juice Suncor’s earnings going forward is debt reduction. Over the last three years, Suncor has reduced its net debt by 35%, from $20.25 billion to $13.19 billion. This reduction in debt will, over time, reduce Suncor’s interest expenses, leading to higher earnings. Additionally, this effect will be compounded by the Bank of Canada’s interest rate cuts, which reduce the cost of variable-rate debt and debt refinancing.
Foolish takeaway: The future looks bright
On the whole, the future looks bright for Suncor Energy. We currently have the foundation for a very healthy oil market, and Suncor is making the most of this situation by paying down its debt. While we probably won’t see the kind of extremely rich oil market in 2025 that we had in 2022, we today have oil prices that will allow Suncor to remain decently profitable. Finally, the company’s most recent earnings release was a significant beat and showed strong growth in cash flows.
All of the pieces are in place for Suncor Energy to thrive in the years ahead. So, I’m comfortable having a small portion of my money invested in SU stock, which I expect to be in a better position in one year than today.
