Suncor Energy (TSX:SU) Stock: Why Is it So Grossly Undervalued?

This Motley Fool article explains why Suncor Energy stock is misunderstood and why it’s actually a value stock worth owning.

| More on:

Suncor Energy (TSX:SU)(NYSE:SU) stock is a prime example of operational and financial excellence. But there’s a problem. As one of Canada’s leading integrated oil and gas companies, it is in the wrong sector. I mean, the oil and gas sector is experiencing what some believe is a slow death. This has resulted in ultra-cheap valuations for most energy stocks. In short, many of them are value stocks.  Please read on as I highlight why I believe that the market has it wrong. This Motley Fool article will explain why Suncor Energy stock is actually here to stay as well as why it is grossly undervalued.

Suncor Energy stock: It’s all about the price of oil

To start off, let’s take a look at the price of oil — where it’s been, where it is today, and where it’s heading. In the last year, oil has soared from $40 per barrel to just over $70 per barrel. This represents an 80% increase. Short-term demand is recovering. Also, it’s projected that long-term demand will grow steadily. This signifies continued strong oil prices. It’s a seismic shift that has had significant implications for energy companies. For example, Suncor Energy is awash in cash. It’s riding high on a sea of good fortunes.

Although Suncor management has no control over the price of oil, it has done a stand-up job with the variables that it does have control over. And this is what makes Suncor a top energy stock. For example, Suncor has worked hard on improving efficiencies and cutting costs. In the last quarter, Suncor generated $2 billion in operating cash flow. In the last six months, Suncor raked in $4.4 billion in operating cash flow.

Value stock: Suncor trades at depressed valuations but financial results are soaring

Suncor stock has been hit hard in the last little while. Since June, the stock is down 22%. This price action is unjustified, in my view. While Suncor has felt the burn of rising natural gas prices and maintenance shutdowns, the longer-term picture is bright.

Suncor Energy Motley Fool value stock

I say this because of a few factors. Firstly, all of Suncor’s operations are running at full steam, as maintenance work is complete. Secondly, Suncor has completed its growth phase, which is a highly capital-intensive phase. The years ahead will see deleveraging, higher margins, and, ultimately, increased shareholder returns. According to Suncor management, we can look forward to a 25% compound annual growth rate (CAGR) of its dividend.

Suncor is taking its place in the new world of clean energy

Previously, I’d mentioned that Suncor stock is in the wrong sector. Simply put, investors are shunning the sector. They want “clean” energy companies. I said that this is why it’s trading at “value stock” levels. On the company’s second-quarter conference call, this attitude was exemplified in a couple of points. The first one is the length of the conference call. It was shorter than usual. Fewer investors are interested, and it shows. The second one was in the number of questions. Needless to say, there weren’t very many. But this lack of interest is good for those of us who are looking for undervalued stocks.

I remember not too long ago when Suncor was an investor darling. It was difficult to find anything negative written about the stock. It was trading above $50, and the widely held opinion was that it would rise “forever.” Well, that overly optimistic attitude was reflected in the stock’s valuation. As you know, it fell hard from that +$50 level.

Today, we are in the opposite scenario. We have in Suncor an undervalued gem that’s churning out cash flow while securing its long-term future and viability. It’s investing in carbon capture and reducing its carbon intensity. It’s also investing in clean energy generation, such as wind and solar energy.

Motley Fool: The bottom line

The bottom line here is simple: Suncor is an energy stock that’s undervalued for reasons that will not hold up in the long term. I fully expect that in time, the stock will rise up out of this undervalued territory. The fundamentals speak volumes — rising shareholder returns will pull Suncor out of the gutter.

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 Karen Thomas does not hold a position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Energy Stocks

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

bulb idea thinking
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Energy stocks are trending upwards on the back of several key factors. And these three continue to be top cheap…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Should You Buy Freehold Royalties Stock for its 8% Yield?

Freehold Royalties is a TSX dividend stock that offers shareholders a forward yield of 8%. But is the energy stock…

Read more »

Muscles Drawn On Black board
Energy Stocks

Is Suncor Energy Stock a Good Buy?

Suncor is on a roll in 2024. Are more gains on the way?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let's take a…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

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

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »

construction workers talk on the job site
Energy Stocks

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

Suncor Energy stock is trading at its decade-high on uncertainty in the oil market. Should you buy, sell, or hold…

Read more »