Partly due to pressure from an activist investor, the firm recently shifted its focus to its main oil sands properties in Alberta.
Meanwhile, we continue to advise that all investors maintain some exposure to the oil and gas industry. To further cut your risk, stick with integrated producers like this one, particularly as its cost-cutting plans should give management more room for dividend increases.
The stock trades at just 9.5 times the company’s forward earnings forecast.
SUNCOR ENERGY INC. (Toronto symbol SU; www.suncor.com) is Canada’s largest integrated oil firm, with major projects in the Alberta oil sands. It also operates four refineries (three in Canada and one in Colorado), along with 1,875 Petro-Canada gas stations.
Suncor’s major projects include its 58.74% stake in the massive Syncrude project; the other partners are Imperial Oil, which owns 25.0%, Sinopec (9.03%) and CNOOC (7.23%). The company also participates in several offshore oil projects near Newfoundland.
Suncor’s proved and probable reserves of 7.2 billion barrels should last 26 years.
[ofie_ad]
The company also operates four refineries: three in Canada (Edmonton, Montreal and Sarnia, Ontario) and one in Colorado. They supply fuel to 1,585 Petro-Canada retail gas stations (Suncor owns 758 of those stations), and 213 stations in the U.S. (it owns 44 of those outlets).
Revenue in the first quarter of 2024 increased 5.9% to $6.14 billion from $5.80 billion. Overall cash flow increased 5.7%, to $3.17 billion from $3.00 billion. Due to fewer shares outstanding, cash flow per share rose at a faster rate of 8.8%, to $2.46 from $2.26.
Energy Stocks: Strong gains should continue thanks to improved cash flow
Investor continue to benefit from Suncor’s new strategy to focus on its main oil sands properties and sell its less-important operations. Thanks to that plan, the stock has gained 40.6% in the past year.
Activist investor Elliott Investment Management owns about 4.1% of the shares. Its pressure prompted Suncor to improve its efficiency. As a result, the company cut 9% of its workforce in 2023. Those actions will save the company $450 million annually, up 12% from its original target.
The company now aims to lower its break-even production costs by $10 U.S. a barrel (for West Texas Intermediate crude) to $43 U.S. by 2026. That’s double its previous reduction target. Suncor is also upgrading its Petro-Canada gas stations. It expects these moves will increase their gross profits 30% by 2027.
These initiatives should help lift Suncor’s free cash flow by a total of $3.3 billion per year (or about 18% annually) between 2024 and 2026.
The company plans to return much of that free cash flow to shareholders. That includes raising the annual dividend rate by between 3% and 5%; the current annual rate of $2.18 a share yields 4.1%. Suncor also plans buy back more of its shares.
For all of 2024, its cash flow will probably rise about 10% to $11.15 a share, and the stock trades at just 4.7 times that estimate.
Recommendation in The Successful Investor: Suncor Energy Inc. is a buy.
