When it comes to energy stocks, you want one that can thrive in any market.
Oil prices won’t always be favourable for exploration and production (E&P) companies.
The crack spread won’t always yield good refining margins.
Even a pipeline will struggle if its users go bankrupt.
But a highly diversified energy company that operates in many different energy sub-sectors can thrive in any market. In this article, I explore one integrated energy company that can thrive in any market and has recently been outperforming the market despite lukewarm oil prices.
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Suncor Energy
Suncor Energy Inc (TSX:SU) is a Canadian integrated energy company that’s involved in every part of the North American energy industry except for midstream.
Suncor extracts and sells crude oil, and refines oil into chemicals and fuels. It operates gas stations. It even once had a small presence in renewables, although it later sold that segment off.
Suncor’s recent performance
Suncor Energy’s stock has been performing brilliantly in the market lately, outperforming the S&P 500 with a 22% price return and a 26% total return. The stock has lagged behind the TSX, but the last year has been an unusually strong one for the TSX index, thanks to major gains seen in the banking sector and the global trend of non-U.S. stocks outperforming U.S. stocks. All-in-all, I’d call Suncor Energy’s price appreciation and dividends over the last year satisfactory, particularly impressive considering that oil prices have basically gone sideways. That doesn’t mean much, though, unless it’s backed by actual strength in Suncor’s underlying business. In the next section ,I will explore Suncor’s various operations in detail to make the case that, yes, Suncor is a strong company.
Suncor’s businesses
Suncor’s strength lies in diversification and operational synergies. The company is involved in many sub-sectors within the energy industry, giving it the ability to thrive in any market. The company also has synergies that let it capture profit at many stages of the energy product life cycle. For example, the company owns its own oil fields, refineries and gas stations, all of which feed into each other.
Suncor’s S&P business is all about extracting crude oil for later sale. This business makes the most money when oil prices are high.
Suncor’s refining business is about turning crude into usable products, mainly gasoline. This segment makes the most money when the ‘crack spread’ (spread between oil and gasoline prices) is the highest.
Suncor’s gas station business is another profit centre for the company; it makes the most money when gasoline prices are the highest.
The company’s natural gas operations have different economics entirely compared to its crude oil-based operations.
As you can clearly see above, Suncor is a highly diversified, resilient business with many operational synergies that can thrive in any market. This is likely the fundamental reason for Suncor outperforming the North American markets and crude oil futures over the last year, meaning the company’s stock rose for valid fundamental reasons.
Foolish takeaway
In markets, there are few prizes more coveted than a stock that can thrive under any circumstances. Such stocks are rare, but they merit lifelong holding periods. As I’ve shown in this article, Suncor Energy is a classic example of a stock that can thrive in any market.
