Suncor Stock: Market-Crushing 4.5%-Yielder Has 25%+ Upside Potential
September 6, 2023
Why SU Stock Is Able to Reward Investors
Suncor Energy Inc (NYSE:SU) is an integrated energy company that has an excellent balance sheet and generates lots of cash. This helps fuel its industry-leading returns to shareholders, which include stock repurchases and reliable, high-yield dividends.
Thanks to record-high oil and natural gas demand and consumption, as well as rising oil prices, the outlook for Suncor stock is tremendous.
Suncor is a Canada-based integrated energy company that has operations around the world. It’s Canada’s second-largest oil producer. The company’s operating segments include Oil Sands; Exploration and Production; Refining and Marketing; and Corporate and Eliminations. (Source: “Suncor Energy Reports Second Quarter 2023 Results,” Suncor Energy Inc, August 14, 2023.)
The company’s Oil Sands segment includes owned operations in the Athabasca oil sands in Alberta to explore, develop, and produce bitumen, synthetic crude oil, and related products.
Alberta’s oil sands have the fourth-largest oil reserves in the world after Venezuela, Saudi Arabia, and Iran. Alberta holds about 160.1 billion barrels of proven oil sands reserves. This equates to a reserve life of about 26 years. (Source: “Oil Sands Facts and Statistics,” Government of Alberta, last accessed September 5, 2023.)
Oil sands are a naturally occurring petrochemical that can be upgraded into crude oil and other petrochemical products. At room temperature, it’s similar to coffee grinds and molasses. Because of the thick nature of the oil sands, it must be processed before it can be refined into gasoline and diesel.
At 54,9000 square miles, which is a little larger than the state of Wisconsin, the Athabasca deposit is the largest, most developed oil sands project in Alberta. Oil sands production is expected to increase from 2.8 million barrels per day in 2017 to 3.9 million barrels per day in 2027. (Source: “Athabasca Oil Sands, Alberta, Canada,” U.S. Geographical Survey, last accessed September 5, 2023.)
Oil sands deposits can also be found in Venezuela, the U.S., and Russia.
Suncor Energy Inc’s Exploration and Production segment includes offshore activity on the east coast of Canada and in the U.K.
The company’s Refining and Supply segment refines crude oil and intermediate feedstock into a wide range of petroleum and petrochemical products. Its pipelines crisscross Canada and cross the central and western parts of the U.S., making their way down to Houston.
The company supplies one-third of the jet fuel used at Denver International Airport, via direct pipeline. Its refinery in Commerce City, Colorado has a throughput capacity of 98 million barrels of oil per day. The Commerce City refinery is the only refinery in Colorado and the largest refinery in the U.S. Rockies.
Suncor Energy Inc also owns Petro-Canada, which has a network of more than 1,800 retail and wholesale locations across Canada.
Suncor’s Corporate and Eliminations segment includes the company’s investments in renewable energy projects and other activities. This includes Canada’s Electric Highway, a coast-to-coast network of fast-charging electric vehicle (EV) stations.
Like all good oil and gas companies, Suncor is always looking for ways to increase its business footprint.
In April, it announced plans to acquire TotalEnergies SA’s (NYSE:TTE) Canadian operations for CA$5.5 billion (about US$4.1 billion) in cash and additional payments that could reach a maximum of CA$600.0 million (about US$450.0 million). (Source: “Suncor Energy to Acquire TotalEnergies’ Canadian Operations for $5.5 Billion, Plus Additional Potential Payments Up to an Aggregate Maximum of $600 Million,” Suncor Energy Inc, April 26, 2023.)
In June, the global demand for oil hit a record-high 103 million barrels per day. The International Energy Agency predicts that oil demand could hit a new record in August of up to 103.6 million barrels per day. In 2024, oil consumption is expected to remain near record levels around one million barrels per day. (Source: “Oil Market Report – August 2023,” International Energy Agency, August 8, 2023.)
Q2 Earnings Beat Wall Street’s Projections
In August, Suncor announced its financial results for the second quarter ended June 30. Note that, at the time of this writing, CA$1.00 is equal to US$0.73.
The company reported second-quarter adjusted earnings of CA$1.3 billion, or CA$0.96 per share, compared to CA$3.8 billion, or CA$2.71 per share, in the same period last year. Analysts were calling for adjusted earnings of CA$0.82 per share. (Source: Suncor Energy Inc, August 14, 2023, op. cit.)
Suncor’s net income in the second quarter of 2023 was CA$1.9 billion, or CA$1.44 per share, compared to CA$3.9 billion, or CA$2.84 per share, in the second quarter of 2022.
Like many energy companies, Suncor Energy Inc joined its global peers in reporting a big drop in quarterly profits as oil and gas prices pulled back from last year’s peak. Global oil prices were down as a regional banking crisis in the U.S. and fears about a possible recession raised concerns about energy demand.
In the second quarter, Suncor Energy Inc’s cash flow provided by operating activities was CA$2.8 billion, or CA$2.14 per share, compared to CA$4.2 billion, or CA$3.01 per share, in the same prior-year quarter.
Suncor ended the second quarter of 2023 with net debt of CA$14.3 billion, down by CA$1.3 billion from its net debt at the end of the first quarter.
During the second quarter, the company’s total upstream production rose by three percent to 741,900 barrels of oil equivalent per day. It also completed all major annual planned maintenance at its refineries, resulting in refinery crude throughput of 394,400 barrels per day.
Commenting on the results, Rich Kruger, Suncor Energy Inc’s president and CEO, noted, “Our In Situ assets and upgraders delivered strong performance once again and helped reduce the impacts of planned maintenance at our integrated operations in the Fort McMurray region.” (Source: Ibid.)
“During the second quarter, we generated $2.7 billion of adjusted funds from operations and delivered $1.4 billion to shareholders, and we’re making good progress on our goal of clarifying, simplifying and focusing the organization to drive improved performance and maximize value for our shareholders.”
Suncor Energy Inc Maintains Quarterly Distribution of $0.52/Share
As mentioned earlier, Suncor’s high cash generation helps fuel its industry-leading returns to SU stockholders.
In 2021, the company increased its total dividends by 100% to $1.68 per share. In 2022, it increased its total dividends by 24% to $2.08 per share. In 2021, Suncor Energy Inc also repurchased six percent of its total shares. In 2022, it repurchased a further eight percent of its shares.
In the second quarter of 2023, the company returned a total of $1.4 billion to its shareholders: $684.0 million in share repurchases and $679.0 million in dividends. In the first six months of 2023, Suncor returned approximately $3.0 billion to its shareholders: $1.6 billion in share repurchases and $1.4 billion in dividends.
In August, Suncor Energy Inc declared a quarterly dividend of $0.52 per share, for a yield of 4.5%.
In the chart below, you can see that Suncor stock’s dividend (the red line) has fluctuated a little. That had to do with the exchange rate, not the company lowering its quarterly distributions.
What isn’t open for interpretation is SU stock’s strong share-price performance. As of this writing, Suncor stock is up by about 13% year-to-date and 14% year-over-year.
Big gains, and that could be just the start. Wall Street analysts have provided a 12-month share-price estimate for SU stock in the range of $39.45 to $44.00. This points to potential gains in the range of 14% to 27%.
Chart courtesy of StockCharts.com
The Lowdown on Suncor Stock
Suncor Energy Inc is a great integrated oil and gas company with a massive footprint across North America. It has an excellent balance sheet and provides industry-leading returns, including reliable, high-yield dividends.
Its second-quarter profits were down, just like those of its peers, but the outlook for oil and gas demand and consumption over the coming quarters is robust. This should help juice SU stock’s dividends and share buybacks.
