After a stellar run in the last two years, energy stocks such as Suncor (TSX:SU) have pulled back significantly in recent months. For instance, Suncor stock more than doubled between 2021 and 2022 and is currently trading 26% below its 52-week high.
In 2022, it delivered record annual returns to shareholders and executed on its capital-allocation strategy. It repurchased 117 million outstanding common shares, increased dividends by 24% and reduced net debt by $3.2 billion last year.
As oil prices touched multi-year highs, Suncor reported adjusted funds from operations of $18 billion in 2022, up from $10.2 billion in 2021 and just $3.8 billion in 2020. It allocated 60% of excess funds towards buybacks and the rest towards lowering debt.
However, let’s see if Suncor can continue to enhance shareholder wealth amid volatile oil prices and the threat of an upcoming recession.
Is Suncor stock a buy or a sell?
In the first quarter (Q1) of 2023, Suncor’s adjusted funds from operations stood at $3 billion, down from $4.1 billion in the year-ago period. It returned $1.6 billion to shareholders via repurchases and dividends.
In the March quarter, Suncor completed the sale of its wind and solar assets for gross proceeds of $730 million and acquired an additional 14.65% working interest in Fort Hills for $712 million. The company confirmed it reached an agreement to sell its E&P (exploration and production) portfolio for $1.2 billion.
Moreover, Suncor entered an agreement to acquire the Canadian assets of TotalEnergies, where the latter also owns a 31.23% working interest in Fort Hills. The acquisition is valued at $5.5 billion and is expected to close by the end of Q3 this year.
While the acquisitions will be funded by debt, Suncor is focused on maintaining its current capital-allocation levels, which suggests it will allocate excess funds equally towards lowering debt and share buybacks.
These acquisitions should allow Suncor to benefit from higher cash flows over time, resulting in higher dividend payouts. Suncor currently pays investors an annual dividend of $2.08 per share, indicating a forward yield of 5.4%. These payouts have increased at an annual rate of 16% in the last 19 years.
What’s next for Suncor stock and investors?
As oil prices have pulled back and the cost of debt has risen, analysts expect Suncor’s adjusted earnings to narrow from $8.34 per share in 2022 to $5.63 per share in 2023. So, Suncor stock is priced at 6.8 times forward earnings, which is very cheap.
But energy stocks are trading at a discount due to the cyclical nature of this sector. In case recession fears are materialized, oil prices and earnings of energy companies, including Suncor, will reduce further, making them a risky investment right now.
Additionally, Suncor reduced its dividends by 55% during the COVID-19 crash three years ago, and a similar cut may occur if the economy remains under pressure.
Alternatively, Suncor is a well-diversified energy giant that has survived multiple economic cycles in the past and returned 382% to shareholders since the end of May 2003, after adjusting for dividends. In this period, the TSX Index has returned around 420%.
Analysts remain bullish on Suncor stock and expect shares to gain over 34% in the next 12 months.
