Suncor Energy Inc. (TSX:SU), Canada’s leading integrated oil and gas giant, has an interesting history. Years of sub-optimal operational and safety performance had finally caught up with Suncor a few years ago. As a result, a new CEO came in and began to revamp everything. The result is record performance for Suncor and Suncor stock, which is fast approaching all-time highs.
But what’s in store for Suncor Energy stock in the next three years?
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Suncor’s business
I’d like to tackle this question by first going over Suncor Energy’s business. In a nutshell, the company’s business is comprised of a downstream segment (refining) as well as an upstream segment (exploration and production). This diversification provides Suncor with the benefit of more predictable and steady cash flows, with each segment driven by slightly different variables.
Also, Suncor’s assets are a system of integrated pieces, where one part can compensate for another and where there’s flexibility to re-direct molecules in order to achieve the largest value-added at any given time.
Record results
The result of these efforts has been operational and safety performance that has been breaking records. For example, in Suncor’s latest quarter, Q3 2024, the company achieved record refining throughput and utilization. Also, production was the highest in the company’s history and profitability was strong despite lower oil and gas prices.
These strong results enabled Suncor to progress on its goal of cleaning up its balance sheet, reaching its net debt target earlier than expected. The significance of this cannot be understated. In the beginning of 2024, Suncor was returning 50% of its excess cash flow to shareholders. Now that this debt target has been hit, this will change. The company will now pay out 100% of its excess cash flow to shareholders. This means more dividends and share buybacks and higher returns.
Suncor – looking ahead
From an operational standpoint, Suncor has been blowing past expectations. Looking ahead, the company expects this momentum to continue. As the company looks to the future, the focus will continue to be on finding opportunities for improvement. This means driving increased value by taking advantage of the company’s integration, finding and fixing bottlenecks, increasing capacity, and driving down capital intensity.
This will be reflected in Suncor’s cash flows. In fact, the company has a target to generate $3.3 billion in incremental cash flow by 2026. As for earnings per share (EPS), the consensus analyst expectation is for EPS of $6.74 in 2027. This is 32% higher than 2023, and it represents a compound annual growth rate (CAGR) of 7.2%.
Suncor stock – valuation
As Suncor has been posting these operational improvements, its stock price has not surprisingly been on a tear. In the last three years, it has rallied 45% and in the last year, it has rallied 29%. In terms of valuation, Suncor Energy stock is trading at a mere ten times this year’s expected earnings and eight times 2027’s expected earnings.
This means that investors are discounting Suncor stock and in my view, not giving the company credit for its very lucrative business. It may be that investors are still wary of oil and gas stocks, over-stating the risk involved, or just simply deploying their money elsewhere, like to artificial intelligence stocks.
The bottom line
Energy stocks like Suncor have really improved their businesses dramatically in recent years. In Suncor’s case, the company is seeing falling costs in conjunction with rising production and throughput. This is the ultimate example of value creation. In three years, I expect Suncor stock to reflect this value creation and to command a higher multiple (valuation).
