As far as Canadian energy stocks go, Suncor Energy Inc. (TSX:SU) stands out. This is because of a unique business that lends itself well to the volatilities of the oil and gas industry. Suncor will be reporting its Q4 results today after the market close.
Let’s try to see where the company stands and what we can expect so we can determine if investing in Suncor is the right move.
Suncor stock: Looking back
So far in 2024, Suncor’s stock price has appreciated 3.1%. In the last five years, Suncor’s stock price has appreciated 67.5%.
Yet, valuation levels remain depressed, as skeptics remain skeptical of Suncor. In fact, the stock trades at a price earnings ratio of a mere 7 times and a price to book ratio of only 1.4 times despite the company’s strong returns. For example, Suncor’s return on equity is more than 20% and its operating margin also exceeds 20%.
If you recall, things weren’t always like this for Suncor. In fact, Suncor was once an investor darling who could do no wrong, and this meant that its valuation was significantly higher. In those days, Suncor’s price earnings ratio was well above 10 times, and even approaching 15 times, and investing in Suncor was seen as a no-brainer.
The quality of Suncor’s business is undeniable. While the company has undoubtedly needed to improve operationally and safety-wise, the underlying business is a good one. You see, Suncor is an integrated oil and gas company, which means it has both an upstream, or production, business, and the refining business. These businesses complement each other, and they derive synergies off of each other. Suncor is looking to maximize these benefits moving forward.
Suncor’s debt level will be higher
After the close of the Total Energy acquisition, Suncor’s debt level was increased from $13 billion in net debt to $13.5 billion to $14 billion. While higher, taking on this extra debt will likely prove to be a good move by Suncor.
This is because the acquisition of Total’s Canadian oil sands assets addresses long-term bitumen supply uncertainty. In securing this supply, Suncor effectively ensures that it can continue to maximize refinery utilization. It also adds value through synergies, and ultimately higher yields.
Another earnings beat is highly likely for Suncor
For the fourth quarter of 2023, analysts are calling for EPS of $1.05 versus $1.81 in the same period the prior year. This equates to a 42% reduction in earnings and it’s partly attributable to the decline of the price of oil. In fact, in the fourth quarter of 2023, oil averaged $78.53 compared to $82.64 in Q4 of 2022.
Interestingly, Suncor has beat expectations in the last seven quarters. This demonstrates the extent to which investors have been bearish on the company. As the company’s fourth quarter earnings release nears, we have reason to believe that this trend is likely to continue.
In the beginning of January, Suncor reported the second highest production numbers. Also, December posted the best month ever, with production averaging over 900,000 barrels a day (bbls/d). Along with this, downstream operations also demonstrated strong performance. In fact, fourth quarter refining utilization came in at a very strong 97%.
The bottom line
Suncor stock has performed well over the last three years, but this is largely because it performed so badly before that. It is in fact trading at roughly the same price as back in 2019. Yet, production is up big since then, as is Suncor’s revenue (+51%), net income (+117%), and cash flows (+48.2%).
In my view, it’s worth considering investing in Suncor stock today.
