Investors looking for exposure to Canada’s lucrative oil and gas industry should consider Suncor Energy Inc. (TSX:SU), a leading integrated energy company.
Earlier this week, Suncor reported another blow-out quarter, which included record operational and financial performance. This has translated to strong and consistent shareholder value creation.
Since the earnings release, Suncor Energy’s stock price has rallied more than 6%. Is the stock a buy?
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Another record quarter
Suncor is a very differentiated name in the oil and gas industry. It holds upstream assets, operates refining and upgrading facilities, and owns the Petro Canada network of 1,800 retail and wholesale locations. What this means is that Suncor is diversified across the oil and gas value chain. This benefits Suncor and its shareholders, as it drives consistent and steady cash flows.
In Suncor’s third quarter, we saw the benefits of its diversified business once again. We also saw the benefits of a culture of operational excellence. Costs were driven downward at the same time that production increased. Hence, cash flows and margins rose nicely. Management’s focus on return on capital was on full display once again.
Upstream production came in at 870,000 barrels per day (bpd), the best ever third quarter. Upgrader utilization was 102%. And refining throughput of 492,000 bpd was another record. The key point that I’d like to drive home here is that even with these increases in production and throughput, Suncor’s operating costs came in at $9.7 billion – flat versus last year. This is true value creation.
Value and performance
Despite reporting yet another record quarter, with record operational and financial performance, it looks like Suncor continues to be underappreciated by the market. Are Suncor’s past struggles to blame for this? Are investors still skeptical? What has to change to get Suncor’s stock price to reflect its inherent value?
I do think that investors are probably still skeptical when it comes to Suncor. And herein lies the opportunity: because this skepticism is misplaced, as Suncor has turned things around spectacularly. This is evidenced in Suncor’s financial and operational performance in the last few years. But what will it take for investors to take notice?
The answer, I think, is simply time and Suncor continuing to do what it has been doing in the last few years. If Suncor can continue to deliver on its guidance, which is calling for strong performance, it’s very likely that Suncor’s stock will be re-rated higher.
Valuation
In the meantime, Suncor continues to create value for its shareholders. In the last three years, the stock has risen 26%. As you can see from the graph below, the stock has actually performed well in the last five years – up almost 230%.
Also, Suncor Energy stock has a lot to offer dividend investors as well, with a yield of more than 4% and strong dividend growth. In fact, its annual dividend has increased 36% in the last three years – for a compound annual growth rate (CAGR) of almost 11%.
Yet, Suncor Energy’s stock is still inexpensive, trading at a mere 13.5 times this year’s expected earnings and 1.6 times its book value. It seems to me that Suncor’s strong cash flow and earnings growth profiles, along with its strong balance sheet and returns are deserving of a higher valuation.
The bottom line
A good rule of thumb when it comes to investing is to look for quality companies that are delivering real value for shareholders. This is what we’re seeing with Suncor. Although it is an oil and gas company and therefore exposed to commodity prices, the company has created a business that minimizes risk and volatility and maximizes returns.
