Suncor Energy (TSX:SU) stock has delivered a phenomenal performance so far this year. Up 30% year to date, it has easily outperformed the TSX Composite Index. If you’d invested $10,000 in Suncor stock at the start of the year and held to today, you’d already be up $3,000. And that’s not even including the stock’s 3.91%-yielding dividend!
The fact that Suncor Energy stock has already rallied so much this year should give pause. The stock’s run has corresponded to a jump in the price of oil, but oil is up just 9.6%, meaning that SU stock has done three times the return of the commodity it sells. It could be that the stock has gotten overheated. However, there are other reasons to think that Suncor still has room to run. In this article, I will explore why Suncor stock might actually be a good buy today despite its already impressive run.
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Why oil prices are going up
Suncor, as an exploration and production (E&P) oil company, is partially a bet on oil prices. This year’s observed rise in oil prices, therefore, is part of the reason why the stock has done so well. To gauge whether Suncor’s future is better than its recent past, then, we need to understand why oil prices are rising.
There are several reasons why oil prices are rising this year. Some of them can be expected to last long term; others could be more short term.
The main reason why oil prices are rising is because demand for oil is still increasing. Despite all of the investments countries are making in renewable energy, oil consumption and demand continue rising, albeit at a slow pace. In the second quarter, oil consumption grew by 71,000 barrels per day.
Second, oil supply has been falling in recent years due to OPEC’s decision to cut output. OPEC nations and Russia started cutting oil output in 2022 and have mostly continued until today. Some analysts think that OPEC will reverse course at its next meeting, though, so this is one factor behind rising oil prices that could reverse.
Suncor’s latest earnings
The effect of rising oil prices was seen clearly in Suncor Energy’s most recent earnings release. In the second quarter, Suncor delivered the following:
- $1.6 billion in adjusted operating earnings, up 29.7%
- $1.35 billion in free funds flow, up 29.5%
- $0.55 in dividends per share, up 5.7%
- $9 billion in debt, down 20%
Overall, it was a great showing. Not only did earnings increase, but debt declined, meaning that there would be less interest expense and, therefore, higher earnings in future quarters.
Foolish takeaway
It’s clear that this year’s rise in oil prices has been kind to Suncor Energy. The company’s earnings are up, its debt is down, and it continues pounding out profit. While I can’t say for sure that oil prices will continue rising, they should at least stay at a healthy enough level for Suncor to be consistently profitable. In the meantime, the company is running its operations as well as can be expected. Overall, I’d say SU stock should do well from here.
