Here Is Why Suncor Energy Inc. Stock Is a Safe Bet on Rising Oil Prices

Here is why Suncor Energy Inc. (TSX:SU)(NYSE:SU) stock stands to benefit the most from rising oil prices.

| More on:
oil, petroleum, refinery

As oil prices maintain their bullish trend, some investors are wondering if this is the right time to start buying oil stocks.

Oil prices have surged more than 13% since early December, with the U.S. West Texas Intermediate (WTI) crude trading at $63.57 a barrel at the time of writing, the highest level since December 2014. Let’s find out if Suncor Energy Inc. (TSX:SU)(NYSE:SU), Canada’s largest producer in the oil sand, offers some value.

Suncor’s advantage

I have been recommending Suncor stock for almost six months now, and the main reason for my bullish call on this company is not based on higher oil prices.

The biggest factor that makes Suncor different from other Canadian oil producers is its strong operational readiness to take advantage of the changing market conditions.

Since the 2014 oil downturn, Suncor management has undertaken an aggressive cost-cutting program. During the past five years, Suncor’s cost to dig a barrel of crude oil has fallen to $25 from $37 in 2013.

This is a huge achievement for an oil sands producer, who will always find it expensive to mine the commodity than producers who operate traditional fields.

With crude prices trading more than $60 a barrel, Suncor expects to generate over $10 billion in funds from operations in 2018, giving it a cash flow yield of ~15%.

Asset diversification

Suncor is also a great diversification play in the Canadian oil sands. The company not only holds the largest reserves in the oil sands, but it also owns and operates four refineries, Canada’s largest ethanol plant, wind farms, and 1,500 retail outlets.

As oil prices recover, and refining margins strengthen, Suncor is in a much better position to produce more cash from its diversified operations than a normal oil producer.

But there are some bottlenecks for Canadian producers. The pipeline capacity constraints combined with increasing Canadian production is forcing some producers to ship their products through more costly mode of transportation, such as rail.

This constraint is eating up these producers’ margins and widening the price difference between the Canadian crude benchmark, Western Canadian Select, and West Texas intermediate. This long-term constraint, however, makes Suncor more appealing for investors due to its diversified operations.

The bottom line

Trading at $47, Suncor stock has surged 28% during the past six months. This price appreciation suggests that Suncor is well positioned to produce better returns for investors, despite some pipeline capacity constraints.

Other than capital gains, Suncor also has a great income appeal for long-term investors. Suncor has a solid history of rewarding investors with growing dividends. The company pays quarterly payout of $0.32 a share with a dividend yield of 2.7%.

Who knows where oil will be trading in the next two to three years? Smart investors know that Suncor’s efficient operations and its diversified assets will be there to help the company crank out decent returns for them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

profit rises over time
Dividend Stocks

Buy 2,990 Shares of This Stock for $165.25/Month in Passive Income

A high-yield dividend stock can transform your investment into monthly passive income streams.

Read more »

close-up photo of investor Warren Buffett
Dividend Stocks

3 Warren Buffett Stocks to Buy Hand Over Fist in November

Warren Buffett has been buying Occidental Petroleum (NYSE:OXY) hand over fist. He previously owned the similar Canadian oil giant Suncor…

Read more »

dividend growth for passive income
Dividend Stocks

Is Intact Financial Stock a Buy for its 1.8% Dividend Yield?

Intact Financial's dividend is not that attractive, but its strong history of execution and dividend growth are compelling factors for…

Read more »

Hourglass and stock price chart
Dividend Stocks

Where Will Brookfield Stock Be in 5 Years?

Based on its recent successes, Brookfield Corp (TSX:BN) looks poised to be more valuable in five years' time than today.

Read more »

hand stacks coins
Dividend Stocks

The Smartest Dividend Stocks to Buy With $400 Right Now

The market is full of dividend stocks to buy. Here's a look at two options that cater to both growth…

Read more »

ways to boost income
Dividend Stocks

This Top TSX Dividend Stock Down 10.78% Is Ready for a Rebound

The rebound of an underperforming but top TSX dividend stock is coming due to a significant product diversification.

Read more »

Canadian Dollars bills
Dividend Stocks

3 Dividend Stocks to Supercharge Your Passive Income

These companies are known for their consistent payout histories and high yields can supercharge your passive-income portfolio.

Read more »

space ship model takes off
Top TSX Stocks

My 5 Favourite Stocks to Buy Right Now

There are plenty of great stocks on the market. Here's a look at my favourite stocks to own for growth…

Read more »