Suncor Energy (TSX:SU) is one of Canada’s most successful oil exploration and production companies (E&Ps). Involved in extracting, refining and selling petro-chemicals, it is a diversified energy conglomerate that has several different pieces of the energy action. It extracts oil from bitumen, sells natural gas, and operates the Petro-Canada gas station chain. It’s that latter activity that most Canadians are familiar with, but there is so much more to Suncor than just gas stations. It is a true North American energy giant.
Oil prices started rallying a month ago, and Suncor has been rallying along with them. That raises the question, how long will this go on for? Ever since oil prices briefly touched $120 in 2022, investors have been excited about oil running up to $100 again. It hasn’t happened. There was one point last year when West Texas Intermediate (WTI) futures touched $96, but like the 2022 price spike, that one did not last for long. In this article, I will explore Suncor Energy’s prospects of thriving in a world where high oil prices aren’t a certainty.
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How Suncor Energy makes money
One reason Suncor Energy could do well in the years ahead — even if oil prices don’t keep rising — is because it has several different ways of making money:
- Extracting and selling crude: Suncor extracts crude oil from tar sands and sells some of it on the global markets, especially the United States market.
- Refining: In addition to extracting raw crude, Suncor also refines crude, a business activity that can be profitable even when oil prices are low. This measure of operational diversification can help Suncor when oil prices are low.
- Gas stations: Suncor sells gasoline and diesel fuel at its Petro-Canada stations. This activity’s profits tend to correlate positively with the price of oil. However, the so-called crack spread (difference between oil and fuel prices) does vary. So, this is a welcome bit of diversification.
Recent earnings
Suncor Energy’s most recent earnings release was a major beat, exceeding analysts’ earnings per share (EPS) estimates by 67%. In the quarter, the company delivered the following:
- $12.8 billion in revenue, down 7.5%
- $2.82 billion in net income, up 2.88%
- $2.17 in diluted EPS, up 6%
- $2.31 billion in operating income, down 46%
It was a mixed showing. Although way ahead of what analysts were expecting, Suncor nevertheless posted negative growth in several key categories. The results will likely be better in the second quarter, though. In the second quarter, oil prices have been much higher than they were in 2023’s fourth quarter, so we might see some growth.
Where are oil prices headed?
The million-dollar question here is where oil prices are actually headed. Forecasting oil prices is notoriously complex — even Warren Buffett lost some money on oil bets in 2014 after he failed to foresee that year’s oil bear market.
Nevertheless, many experts are bullish on oil today. Buffett is back into oil stocks and is doing better with them this time compared to last time. Others, such as Carl Icahn, have been making similar bets. With China continuing to grow and nations seemingly not in any hurry to switch to nuclear or renewables, it would appear that oil will be in demand for some time to come.
