Should Suncor (TSX:SU) Stock Be on Your Buy List Right Now?

Suncor stock looks cheap right now. Is this the right time to buy the shares?

| More on:

Suncor (TSX:SU)(NYSE:SU) is down nearly 25% from the 2021 high amid a pullback in oil prices fuelled by new COVID-19 variant fears. Investors who’d missed the 2021 surge are now wondering if this is a good time to buy Suncor stock for their portfolios.

Oil market

WTI oil trades near US$67 per barrel at the time of writing. That’s down from the 2021 closing high around US$75 it hit in July. The pullback isn’t a surprise after the strong rally from the fall of 2020. WTI oil traded at just US$36 per barrel last October.

Recent weakness comes as traders fear that the spread of the Delta variant in China, the United States, and other large oil-consuming countries could delay the economic recovery and slow the rebound in fuel demand. Investors might also be taking the opportunity to book profits after the White House encouraged OPEC to increase supply at a faster pace to drive down oil and fuel prices.

Speed bumps in the post-pandemic recovery are expected and a pullback in the price of oil was anticipated after the stellar run. While more downside could be on the way in the near term, the recent correction is likely a pause before another move higher. Airlines are ramping up routes, and commuters will likely start hitting the highways again in large numbers by the end of the year.

At the same time, energy companies continue to protect cash flow and are just starting to look at raising capital expenditures to take advantage of the rebound in oil prices. Globally, major oil developers shelved hundreds of billions of dollars in exploration and development spending since the start of the pandemic. With ESG pressures mounting on the industry, much of the previously planned spending might never materialize.

As a result, oil bulls predict a potential supply shortage by 2025. If they are correct, pundits anticipate a surge in the price of to US$100 or higher.

Suncor earnings

Suncor reported strong Q2 2021 results that show the company is bouncing back after a brutal 2020. The business generated $2.4 billion in funds from operations in the quarter compared to $488 million in the same period last year.

Suncor is using the 2021 cash windfall to reduce debt and buy back shares. The company bought back 1.5% of the outstanding common stock in the quarter, spending $643 million.

Investors should see the dividend start to increase again in 2022. Suncor slashed the payout by 55% last year. The move surprised many people and has likely contributed to Suncor’s underperformance among the large Canadian oil producers this year. Over the long term, however, the focus on debt reduction and stock repurchases right now should pay off for patient Suncor shareholders.

Should you buy Suncor stock now?

Suncor trades near $23.50 per share compared to $31 in June and $44 before the pandemic, when WTI oil actually traded lower than it does today. Ongoing volatility should be expected in the oil market over the coming months and additional downside in Suncor’s stock price is certainly possible.

That said, oil bulls might want to start buying the shares at the current level. The stock looks undervalued right now, and a return to the $40 mark wouldn’t be a surprise by the end of next year, as the global economy rebounds. In the meantime, you’ll pick up a reasonable 3.5% dividend yield with decent dividend growth likely on the horizon.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker owns shares of Suncor.

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »