Written by Andrew Walker at The Motley Fool Canada
Suncor (TSX:SU)(NYSE:SU) continues to trail its oil sands peers. The stock trades near $39 per barrel at the time of writing. That’s down from the 2022 high above $53 and is about 10% below where Suncor traded in early 2020 before the pandemic. In contrast, the other larger Canadian oil companies sport share prices that are at least 60% higher than their pre-pandemic levels.
Suncor upset investors when it cut the dividend by 55% in 2020 to preserve cash flow during the crash. The board later increased the distribution by 100% in late 2021 and by another 12% when Suncor reported the first-quarter (Q1) 2022 results. The payout is now back above the pre-cut level, but investors are still not giving the stock any love.
That might change in the coming 12-18 months. Suncor’s chief executive officer recently resigned, and changes on the board could lead to a decision to divest some assets. Suncor is an integrated business with production, refining, and retail operations. Pressure is mounting to unlock value through the monetization of the retail group, which includes roughly 1,500 Petro-Canada service stations. An activist investor says the business could fetch up to $9 billion. Analysts have suggested it could be worth more if a bidding war emerges for the assets.
In the event Suncor decides to sell the retail business and gets close to $10 billion, the stock price could take off, and investors might receive a generous special payout.
The company reported Q2 2022 adjusted operating earnings of $3.8 billion compared to $722 million in the same period last year. Suncor is reducing debt while buying back up to 10% of its outstanding stock under the current normal course issuer bid (NCIB) and will likely continue to repurchase shares aggressively next year.
WTI oil trades for less than US$90 per barrel at the time of writing. This is down considerably from the US$120 the price hit a couple of times this year but is still extremely profitable for Suncor. The dip might turn out to be short-lived. Demand growth is expected to increase with airlines ramping up capacity and commuters set to hit the roads this fall by the millions. China has reduced consumption in 2022 due to COVID-19 lockdowns. That situation could reverse heading into next year.
On the supply side, global producers have limited room to boost output due to significant investment cutbacks over the past two years. Pressure to reduce emissions in the coming years will keep large projects on the shelf, and most producers are simply happy to invest enough to maintain output and reap the large profits.
Should you buy Suncor stock now?
Suncor stock looks undervalued. Investors can get a 4.8% yield right now and simply wait for the market to realize the value in the stock price. If you have some cash to put to work in a contrarian self-directed RRSP, Suncor stock deserves to be on your radar.
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The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker owns shares of Suncor.