Suncor Energy (TSX:SU) stock is finally getting interesting again. After falling 21.3% from its summer 2022 peak, the stock is now only $42, which is a decent entry point by historical standards. There is no doubt that Suncor stock was getting overheated at its highs last year. When the stock went to $53, investors were largely reacting to oil prices, which were soaring at the time. Oil prices came down, so it’s not surprising that Suncor stock came down as well. Suncor sells oil and gasoline, after all, so its revenue should correlate with the price of oil.
However, there is reason to think that Suncor stock could rise again. Recent moves from some of the world’s biggest oil exporting nations bode well for long-term oil prices, and, furthermore, Suncor is arguably undervalued even at today’s oil prices. In this article, I will explore why Suncor Energy stock is getting interesting again in April 2023.
OPEC doing a big output cut
The Organization of Petroleum Exporting Countries (OPEC) is a group of nations that exports a large percentage of the world’s oil. It consists of nations like Saudi Arabia, the United Arab Emirates, and Kuwait. By some definitions, Russia is part of OPEC (more specifically, OPEC+)–it has certainly been cooperating with the cartel lately.
On Sunday, news broke that the major OPEC nations were all cutting their oil output significantly. Saudi Arabia and Russia both signaled 500 barrels per day reductions in output for May, while the other member states signaled lower cuts.
OPEC cutting output is a big deal, because it would tend to indicate that oil prices will rise. In economics, less supply makes the price of a thing rise, if the level of demand is held constant. There are some nuances to the dynamic; for example, elasticity, which measures how much demand and supply change in response to one another and to price. For most goods, the price will go up when supply goes down, holding everything else constant. There’s a good probability, then, that OPEC’s oil price cuts will increase the price of oil. That would be good for Suncor.
Still cheap at today’s oil prices
There’s an argument to be made that Suncor stock is cheap today whether the price of oil rises or not. In its most recent quarter (Q4), Suncor delivered
- $2.7 billion in earnings, up 80%;
- $4.1 billion in funds from operations, up 32%; and
- $3.9 billion in cash from operating activities, up 50%.
It was a pretty strong quarter. The oil price in Q4 was not even that high, but thanks to the debt Suncor repaid in earlier 2022 quarter, the company was able to post strong earnings growth anyway. So, subsequent quarters may be better than what the markets are expecting. If that turns out to be the case, then Suncor may still be cheap today compared to future earnings.
Foolish takeaway
With OPEC’s latest bombshell announcement, it has become clear that oil is still relevant. Various different sectors of the economy will react to the oil price news in different ways. For oil companies like Suncor, the news is unambiguously positive. For the rest of society, the effect remains to be seen.
