2-for1 Sale
Suncor Energy (TSX:SU)(NYSE:SU) is one of the top investor favourites in Canada. Many investors have turned to Suncor for their exposure to energy stocks, as the integrated oil companies are some of the only companies managing to keep their operations stable in this low oil price environment.
Suncor is a top company because of its high-quality execution and its ability to grow so quickly. Its vertical integration gives it such a strong competitive advantage that all long-term investors should have some exposure. In fact, even the world’s greatest investor, Warren Buffett, owns shares of Suncor.
So, is it a buy below $40, and should you buy shares today if you are underweight?
Suncor stock has had a mediocre year so far in 2019. It’s currently trading in the middle of its 2019 trading range, and although it’s come off its highs of around $47, it’s still roughly 10% off its lows.
This seems like a pretty fair value given how its traded recently, so let’s take a look at the fundamentals to see how strong it really is.
Over the last few years, it has increased its revenue considerably, as it’s dealt with the new level of oil prices after the crash in 2014. This, of course, was after it already fared well handling its issues, when many other companies had major problems.
Now, as oil settles into a new normal trading range, the numbers Suncor is putting up are impressive. It has managed to bring total operational costs down, so its breakeven oil price is $45 WTI. This breakeven point includes both sustaining costs as well as sustaining the dividend.
Given that $45 WTI is basically below the bottom of the current range oil has been trading in during 2019, it’s fair to say it would take another major oil price shock to cause any issues with Suncor’s profitability.
Its vertical integration may be the most attractive feature about it, because on top of the roughly 800,000 barrels a day of upstream production it will do, Suncor will also refine a little more than half of that amount, and then sell it all to the end consumer through its network of 1,750 retail locations.
The impressive operations of Suncor are coupled with solid liquidity and strong financial discipline, which is why it’s such an investor favourite.
Currently, its total debt to capitalization is just 29%, which is right in its target range. Suncor aims to keep that between 20% and 35%.
It’s crucial for oil companies to stay on top of their financing; as we’ve seen in the past, a sudden oil shock could send poorly financed companies into ruin.
The dividend today yields roughly 4.25% at a payout ratio of less than 45%. In addition to the dividend, it’s also been buying back shares. Between the dividend and share buybacks, shareholder returns were roughly 7% in 2018.
Investors can also expect the dividend to grow, as Suncor has a history of raising its payouts as it grows its operations. It now has 17 consecutive years of dividend increases, including the 17% increase in the first quarter of 2019.
Suncor continues to be one of the best companies in Canada, especially for investors seeking energy exposure, and I would say it’s a strong buy under $40, considering the excellence of the company and the major potential it has to continue to grow.
