Suncor (TSX:SU) is up 22% in the past year. Investors who missed the rally are wondering if SU stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Suncor stock
Suncor trades near $53.50 at the time of writing. The stock jumped 8% in recent days as oil prices spiked on geopolitical concerns, reversing an extended slide in the price of oil over the past six months.
Volatility is nothing new for the oil market. Oil bears gained the upper hand in recent months as rising global supply from both OPEC and non-OPEC producers combined with a weakening demand outlook, especially in China. This led the price of West Texas Intermediate oil to decline from US$86 per barrel in April to as low as US$66 earlier this week.
The latest spike is due to increased tensions between Israel and Iran. Oil traders are concerned that Israel could target Iran’s oil infrastructure. Markets are also worried that Iran might decide to block oil tankers from passing through the Strait of Hormuz, a narrow waterway between Iran and Oman where 20-30% of the world’s oil deliveries, roughly 90% of Persian Gulf production, must pass to reach global consumers. Analysts speculate that a worst-case scenario could send oil to US$200 per barrel.
Operational results
Suncor put a new chief executive officer in place in 2023. The company has since cut costs, sold off its wind farms, and boosted production to a record of 803,000 barrels per day for the first six months of the year.
Management plans to raise production by 100,000 barrels per day through 2026. Excess cash is being used to reduce net debt and to buy back stock. Suncor spent $825 million in the second quarter (Q2) on share buybacks. The company increased the allocation of excess funds for share repurchases to 75% and will bump it up to 100% when net debt drops to $8 billion. As of June 30, net debt stood at $9.05 billion, down roughly $500 million from the previous quarter.
The slide in oil prices through the summer will likely lead to weaker Q3 2024 results compared to the first part of the year.
Outlook
The opening of the Trans Mountain pipeline expansion earlier this year is good news for Suncor. The new access the pipeline provides to global markets has already led to an improvement in Western Canadian Select oil prices. In addition, previous problems with pipeline bottlenecks are no longer an issue.
Suncor continues to make progress on its turnaround efforts. This, along with rising output, should help drive better profitability in the coming years.
Dividend
Suncor raised the dividend by 5% for 2024. At the current share price, the stock provides a yield of 4%. The distribution is now higher than it was before Suncor slashed the payout in 2020 at the outset of the pandemic crash. Suncor upset long-time owners of the stock when it cut the payout. Confidence in the new management team could bring investors back.
Time to buy?
You need to be an oil bull to own Canadian oil stocks. If you fall in that camp, Suncor should be a solid pick at this level, and you get paid a decent dividend to ride out the turbulence. If things get out of control in the Middle East and oil prices spike, the stock would likely surge.
Oil bears, however, who think the geopolitical risks to the oil market are overblown might want to look for other opportunities. A global recession and ample oil supplies could keep oil prices under pressure through next year. If that situation materializes, Suncor’s share price will likely trend lower.
