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Suncor (TSX:SU) continues to trail its TSX oil sands peers in the oil-sector recovery. Investors with a contrarian strategy are wondering if Suncor is now undervalued and good to buy for a portfolio focused on dividends and total returns.

Oil market outlook

West Texas Intermediate oil trades for close to US$78 per barrel at the time of writing. That’s down from the surge above US$120 per barrel last year but still a lucrative level for most oil producers. The market volatility investors witnessed in the past three years will likely continue over the medium term, although the range between the peaks and troughs should narrow.

Oil bears say a global recession will slow the recovery in the energy sector in the coming 12-18 months. At the same time, they expect the expansion of electric vehicle production and renewable energy installations to eat into long-term demand for gasoline and fossil fuels used to generate electricity.

Bulls, however, say soaring demand for air travel and the return of millions of commuters to highways will drive fuel and gasoline demand growth for several years. They also point to tight supplies. OPEC recently reminded the market that it intends to manage output to keep prices elevated. Industry experts and senior executives at oil firms have also indicated that there is limited capacity or motivation to ramp up production.

Producers slashed capital budgets by hundreds of billions of dollars during the pandemic and current spending is set at a level to simply maintain output. Investors want excess cash to go into their pockets, instead of into new production facilities. At the same time, ESG (environmental, social, and governance) targets and uncertain regulatory conditions are making it less attractive for executives to greenlight expensive new development projects.

How things will pan out in the coming years is anyone’s guess, but the bulls might have a more convincing case today.

Suncor

Suncor trades for close to $41 per share at the time of writing. That’s down from $53 in June last year and pretty close to where the stock traded in early 2020 before the pandemic crash sent the share price to $15.

Investors who purchased Suncor stock in October or November 2020 are sitting on decent gains, but the share prices of Suncor’s oil sands peers have rallied to levels that are much higher than their pre-pandemic prices.

This underperformance at Suncor led to a tumultuous 2022 for the management team. Pressure from an activist investor likely led to the eventual resignation of the chief executive officer last year. Ongoing safety issues didn’t help.

A new oil industry veteran is now at the helm. It will take time to turn things around, but Suncor was already on the path coming into this year.

Suncor underwent a strategic review in 2022 to identify core businesses in the portfolio. The company decided to maintain the integrated structure that includes production, refining, and retail business lines. At one point, the firm considered monetizing the retail operations, which include roughly 1,500 Petro-Canada sites.

Suncor has, however, sold its renewable energy assets and some international holdings.

Management upset loyal shareholders when the board cut the dividend by 55% at the start of the pandemic. The subsequent reversal of the decision and new dividend increases have bumped the payout to a new high, but investors are still grumpy. At the time of writing, the stock offers a 5% dividend yield.

Time to buy Suncor?

Suncor used the cash windfall from high prices in 2021 and 2022 to reduce debt and aggressively buy back stock. The balance sheet is now in decent shape, and investors should eventually see the benefits of these measures.

Volatility should be expected, and the bears could prove to be correct, but contrarian investors might want to start nibbling near $40, especially if you are in the bull camp regarding future oil prices.

The post Is Suncor Stock Undervalued? appeared first on The Motley Fool Canada.

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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Suncor.

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By: Andrew Walker
Title: Is Suncor Stock Undervalued?
Sourced From: www.fool.ca/2023/04/30/is-suncor-stock-undervalued/
Published Date: Sun, 30 Apr 2023 14:00:00 +0000

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