In the last few years, Suncor Energy Inc. (TSX:SU) has gone from being an “investor darling” to being shunned and criticized at every turn. Yet, in reality, the core value of Suncor’s business has not changed that drastically. Today, Suncor stock has a very generous dividend yield of almost 5% and it remains pretty cheap.
Here are the reasons why Suncor Energy stock is worth a serious look.
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Suncor’s dividend history speaks volumes
In the last 10 years, Suncor’s annual dividend has increased 300% to the current $2.18. That’s a compound annual growth rate (CAGR) of 15%. And for all of us longer-term investors, Suncor’s 20-year dividend history is even more impressive – a 2,000% dividend increase over that time period. In the oil and gas industry, which is notorious for major swings in commodity prices and company cash flows, this is all the more impressive.
So we’ve gotten a glimpse of the kind of value creation that Suncor Energy stock has posted over the last decades. Now, let’s take a look at why I think this will likely continue as we head into future decades.
Suncor’s new CEO should mean good things for the stock
Recently, many issues have plagued the company, such as safety issues and sub-optimal operations. Looking ahead, a new CEO is in place to drive improvements and bring the company back to its glory days. This process has already begun, with the benefits becoming increasingly obvious.
A plan to reduce costs in virtually all aspects of the business is taking shape. For example, staffing will be reduced by 20%. This will reduce costs by approximately $400 million, or $1.50 per barrel. Also, many operational improvements have been completed in order to boost efficiency and safety. Equipment features such as collision awareness and fatigue management are in an increasingly large number of equipment. This will drive better operations and safety records – both key issues that Suncor has struggled with.
Suncor focusing on what it does best
Suncor Energy is an integrated oil and gas company. This means that it has both upstream and downstream operations such as oil sands production as well as refining, or upgrading assets. This business model has afforded Suncor with the benefits of diversification – generating strong and stable financial results over the long term.
Earlier this year, Suncor announced its intention to acquire TotalEnergy’s Canadian operations. This acquisition includes Total’s remaining interest in the Fort Hills oil sands project as well as in the Surmont in situ asset. It effectively makes Suncor the sole owner of Fort Hills, and this brings with it many advantages.
Firstly, it provides Suncor with long-term bitumen supply to its upgraders at a competitive supply cost. This added bitumen supply flexibility increases the likelihood that Suncor’s upgraders will function at high utilization rates. Also, Suncor will now have additional oil sands assets and reserves, and as the sole operator of Fort Hills, flexibility in its capital investment decisions. The Fort Hills mine will ultimately be used to better Suncor’s position as a whole, without any competing interests to interfere with this goal.
The bottom line
Suncor’s stock price has pretty much been range-bound recently. In fact, it has been stuck in the low to mid $40 range over the last 10 or so years.
Today, Suncor’s stock price does not reflect the company’s true value, in my view. This is a function of the fact that crude oil is trading in the mid-$70 range. Also, Suncor is taking steps to improve its performance. Therefore, I see a real catalyst for value creation.
