Oil stocks are giving back some of the 2022 gains, and this has investors who missed the big rally in the first part of the year wondering if top Canadian oil stocks are oversold. Let’s take a look at Suncor (TSX:SU)(NYSE:SU) to see if it deserves to be on your TFSA or RRSP buy list.
Oil market
Oil demand continues to rebound from the pandemic crash, as economic activity recovers, airlines boost capacity, and commuters head back to offices. On the supply side, major producers are investing only enough to maintain production, as they focus on paying down debt and returning cash to shareholders. A lack of investment in exploration and development across the global oil industry is creating tight supply conditions that are unlikely to change in the near term. It takes time for capital investments to drive production growth, and that means supply shortages could remain in place over the medium term. Sanctions against Russia are driving prices even higher.
At the time of writing, WTI oil is US$117 per barrel. This is a very profitable level for oil producers, and oil prices above US$100 are expected to be in place through the end of the year and likely next year as well.
Economists are currently predicting a mild economic downturn, as central banks increase interest rates to fight inflation. A deep global recession caused by rate hikes, the war in Ukraine, and ongoing supply chain issues could hit oil demand in 2023 or 2024. In the event the price of oil plunges below US$100 per barrel, oil stocks will take a hit.
Should you buy Suncor stock now?
Suncor trades near $48 per share at the time of writing compared to a recent high above $53.50. The stock fell out of favour with energy investors after the board cut the dividend in 2020 to preserve cash during the downturn. Suncor has since raised the payout to a new high, but the distribution increases still lag some of its large oil sands peers. The stock picked up a bit of momentum in the past couple of months after news came out that an activist investor had taken a large position in the company and planned to shake up management and the board.
Suncor stock, however, still looks undervalued, especially after the recent dip. The company’s oil sands operations generate significant profits at current oil prices and that will become apparent when the Q2 2022 earnings get announced. In addition, Suncor’s refineries and retail locations should continue to deliver improved results as demand for fuel increases. Commuters and businesses need to fill their tanks, even with gas and diesel prices at elevated levels.
Suncor traded for $44 per share before the pandemic when oil was US$60 per barrel. With the downstream operations bouncing back, the stock price should probably be much higher than it is today.
If you have some cash to put to work in a TFSA or RRSP and are of the opinion that oil prices will stay high for the next few years, Suncor deserves to be on your radar.
