Commodity stocks are an interesting type of stock. Their cyclicality means more volatility, with more upside but also more downside. For this reason, many investors are nervous about investing in these stocks. Oil and gas stocks like Suncor Energy (TSX:SU) are commodity stocks but with a twist. Up 70% in the last seven months, can Suncor Energy stock maintain this strength?
Let’s look into this.
Suncor is a different kind of commodity stock
As an oil and gas company, Suncor is obviously exposed to oil and gas prices. But Suncor is different. Its focus has been on diversification and exposure to many different parts of the value chain, which lowers risk. It steadies cash flows from one quarter to another, as it lessens the impact of changes in oil and gas prices on cash flows.
Suncor’s oil and gas business comprises a large network of downstream locations (refining) as well as an upstream segment (exploration and production). It’s also comprised of 1,800 Petro Canada retail and wholesale locations across Canada. This means that the company has exposure to different parts of the oil and gas value chain. It also means that Suncor has the ability to make decisions to take advantage of the most profitable area at any given time. And it means that Suncor is not as concerned with the WTI oil price as it is with the spread – or the difference between the refined product prices and the raw commodity (oil and gas) prices.
Record operational performance
It’s tempting to believe that Suncor Energy’s recent stock price performance will be followed by weakness. After all, the stock has broken records and is now trading at all-time highs. And it’s a commodity stock, so this can be viewed as a sell signal.
However, as I discussed in the previous section, Suncor is not exactly a typical commodity or oil and gas company. But more than this, Suncor has been breaking records within its business. And I think that this, in and of itself, can justify its stock price action. And I also think that this means that there could be a lot more upside to be had.
For example, in Suncor’s latest quarter, production broke records. Utilization broke records. Operating costs trended lower, and of course, this was accompanied by record financial performance as well. Adjusted funds flow increased 1% versus last year to $3.8 billion despite lower oil prices. Adjusted funds flow per share increased 6% to $3.16 because of Suncor’s share-buyback program.
Additionally, the company’s earnings per share (EPS) for the quarter came in at $1.48, far surpassing expectations of $1.08 and consistent with last year despite oil prices that were significantly lower.
The bottom line
At this time, Suncor Energy stock is trading at a mere 14 times this year’s earnings and 6.2 times cash flow. In my view, the company’s momentum can be expected to continue. And while oil prices are important, it’s more complicated than that. Suncor’s returns are up, and shareholder value creation is rising right along with it. For dividend investors, Suncor stock is currently yielding 3.8% and is backed by relatively steady and predictable cash flows.
