Why Suncor Energy (TSX:SU) Stock Crashed Last Week

Suncor Energy (TSX:SU)(NYSE:SU) stock crashed along with oil prices last week.

| More on:
oil and natural gas

Image source: Getty Images

Suncor Energy (TSX:SU)(NYSE:SU) stock crashed last week in an abrupt reversal to a year-long pattern of market-beating gains. Crude oil futures trended downward for most of last week, as the Federal Reserve raised interest rates by 75 basis points. The large interest rate hike was thought to have had the potential to cause a recession, which may have led to traders betting on less demand for oil in the future.

In this article, I will explore the main reason why Suncor Energy stock crashed last week and ask whether it could rise again in the future.

Oil prices collapse

The major culprit for SU’s crash last week was lower oil prices. SU’s most recent earnings release was very good, but lower oil prices will lead to lower earnings in the future. Suncor’s earnings are directly correlated with the price of oil. There are other factors in the mix, too, like output and costs. But the price of oil is a direct contributing factor. The higher the price of oil, the higher an integrated energy company’s earnings, holding other factors constant.

This can be seen by looking at Suncor’s recent earnings results. In 2020, when the price of oil was low (at one point negative), SU ran four consecutive losing quarters. In the most recent quarter, when the price was high, Suncor delivered

  • $4 billion in adjusted funds from operations, up nearly 100%; and
  • $2.9 billion in net income, up 259%.

The difference was night and day. Most likely, the high prices of oil observed in Q1 were behind it. When oil prices rise, integrated energy companies earn more profits without incurring more costs. So, their margins improve.

A long way to go until earnings

Can Suncor Energy stock rise even with oil prices lower?

My personal feeling is yes.

Suncor Energy stock currently trades at just six times free cash flow, suggesting a very cheap valuation. If it were to merely replicate its second-quarter earnings for two more quarters, then it would produce cash flows that would take that ratio even lower — assuming, that is, the stock price didn’t change.

It doesn’t look like oil stocks are currently “pricing in” the high price of oil being observed. Even if oil prices just stay flat from this point onward, oil stocks are likely to deliver earnings that exceed what analysts are expecting. That could push their prices higher, even if oil itself doesn’t move.

Foolish takeaway

2022 has been a banner year for Suncor Energy. With a rising stock price, rising earnings, and a higher dividend, the company appears to be doing everything right. Partially, this is luck: rising oil prices created a windfall that nobody could have anticipated last year. But even if oil prices just stay around $100, the stock could do well, as it is still extremely cheap. Investors might want to brace for short-term volatility, though, because oil stocks do correlate with oil prices on a day-to-day basis. As long as oil stays in a supply crunch, then Suncor should do well.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Energy Stocks

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Is Canadian Natural Resources Stock a Good Buy?

CNRL is an energy giant with a market capitalization near $100 billion.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Baytex Energy Stock a Good Buy?

Baytex Energy is a TSX stock that has massively underperformed the broader markets in the past decade, but it trades…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Suncor a Buy for its 4.2% Dividend?

Suncor Energy (TSX:SU) has a 4.2% yield. Is it a buy?

Read more »

engineer at wind farm
Energy Stocks

Energy Stocks to Buy Now: Top Picks for Canadian Investors

These companies have a solid business model and growing cash flows to support higher dividend payments and share prices.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Is Enbridge Stock a Good Buy?

Enbridge provides a 6.5% dividend yield right now.

Read more »

Oil industry worker works in oilfield
Energy Stocks

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

Suncor stock looks undervalued as the company continues to increases cash flows, earnings, and shareholder returns.

Read more »

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 »