Shares of Suncor Energy Inc. (SU, Financial) have surged by more than 5% since the turn of the year while providing investors with the added benefit of a trailing dividend yield worth 4.6%.
However, calls on Wall Street paired with a juxtaposed economic environment suggest it is time to reassess Suncor's prospects. As such, I decided to flow through a holistic analysis of the stock. Here are a few factors to consider.
Wall Street's mixed conclusions
Wall Street's outlook on Suncor's stock is mixed and matched. For instance, Cowen recently downgraded the stock on the premise the company lacks near-term operating momentum.
However, on the other side of the spectrum, Wells Fargo upgraded Suncor in August, stating its "hands-on" C-suite provides a competitive advantage.
Disparity among analysts usually stems from non-linear analytical processes. For example, one analyst might favor a quantitative top-down approach, whereas another might opt for a bottom-up fundamental analysis. However, regardless of the cause, the disparity among analysts suggests Suncor might be a "wait and see" stock for now.
Suncor's fundamentals
Suncor released its second-quarter earnings results in August, revealing an adjusted profit of $1.4 billion.
Although the company remains profitable, its second-quarter results softened significantly as its bottom line receded by approximately 213%. Therefore, suggesting a reassessment of the company's fundamentals is of the essence.
Most of Suncor's quarterly headwinds stemmed from lower oil and gas prices. However, the situation has changed since then as oil and gas prices have shot up significantly in the past two months. Thus, the question becomes: Are Suncor's idiosyncratic features robust enough to allow the company to take advantage of recovering commodity prices?
Let's dig a little deeper to find out.
Based on its latest guidance, Suncor looks set to deliver around 740,000 to 770,000 upstream barrels of oil per day until the end of its current financial year. Moreover, Suncor's management expects refinery utilization to settle between 92% to 96%, translating into 550,000 to 580,000 in refined products sold.
Although Suncor's general production forecast seems strong, factors such as planned maintenance at key sites and sluggish global industrial production must be considered to balance the argument.
Source: Suncor
A quantitative yet fundamental vantage point suggests Suncor remains in good shape. Sure, the company has tapered from its cyclical peak since the turn of the year. Nevertheless, its profitability ratios remain best in class. The company's return on equity ratio of 15.10% is particularly encouraging as it communicates its ability to pass along value to its shareholders.
In essence, Suncor's core operations look solid. Nevertheless, much of its future performance is likely contingent on commodity prices.
Commodity price sustainability
Oil and gas prices tapered throughout the first half of the year as the economy softened from its cyclical peak. Although economic activity remains flimsy, oil and gas discovered renewed support in recent months, suggesting a shift occurred in the supply-demand landscape.
In my view, risk factors such as the higher for longer interest rate environment and consumer pessimism will eventually lead to lower oil and gas prices. Therefore, although prices ticked up in the interim, trend growth will likely diminish.
If my prediction is realized, we will likely see Suncor succumb to systemic risk, as its distinctive features will be unable to fend off price pressures. However, the company's sound infrastructure means it could achieve best-in-class returns if commodity prices remain stable.
Other material events – Total acquisition
Another factor that could play into Suncor's future valuation is its agreed-upon acquisition of TotalEnergies' (TTE, Financial) Fort Hills oil sands mining project. According to reports, Suncor is set to onboard a 31.23% working interest in the project for a fee of $1.1 billion, illustrating the company's desire to expand its asset base.
In my opinion, the acquisition comes at a good time, as corporate acquisition premiums are slightly depressed. Moreover, the asset might contribute to Suncor's vertically integrated business model, potentially adding cost-saving synergies as time moves along.
Relative valuation and dividends
At first sight, Suncor's price multiples suggest the stock is fairly valued at best.
For example, when dialing into the stock's price-\-book multiple of 1.45, it is evident that there is little sign of absolute value. Moreover, the metric is in the 40th industry percentile, meaning there is no evidence of relative value.
Most of Suncor's price multiples are ranked similarly to the price-book ratio, suggesting the stock is priced in by the market.
Despite its questionable valuation, Suncor's dividend structure is compelling. The stock possesses a forward dividend yield of 4.61%, backed by sustainable stock buybacks. As such, I think Suncor provides investors with an ideal opportunity to reduce their cost basis in the long term.
Pairs trading analysis
A technical analysis of Suncor's stock implies its current price level needs to be revised. For example, the stock's year-to-date return is above a diversified sector exchange-traded fund in the Fidelity MSCI Energy Index ETF (FENY, Financial). Additionally, Suncor's year-to-date returns have outpaced Duke Energy (DUK, Financial), a close industry compatriot.
Guru trades
Copying guru trades does not guarantee success. However, observing the trades provides helpful information that can be phased into one's holistic analysis.
The latest 13F filings suggest that Wall Street's whales are divided on Suncor's prospects. For example, Ken Fisher (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates recently reduced their positions, whereas Arnold Van Den Berg (Trades, Portfolio) and the T Rowe Price Equity Income Fund (Trades, Portfolio) added the stock to their portfolios.
Final word
A holistic analysis of Suncor shows it is at a crossroads. Although temporary support from rising commodity prices may result in many investors adding the stock to their portfolios, other variables, such as a cyclical downturn in the economy and pessimism from Wall Street, may cause a sell-off.
