An increase of 70% in 7 months! Is it too late to invest in Suncor Energy stock?

Commodity shares are an interesting type of shares. Their cyclicality means more volatility, with more positive aspects, but also more negative aspects. For this reason, many investors are nervous about investing in these stocks. Oil and gas stocks like Suncor Energy (TSX:SU) are commodity stocks, but with a twist. Can Suncor Energy stock maintain this strength, up 70% in the past seven months?

Let’s take a look at this.

Suncor is a different kind of commodity stock

As an oil and gas company, Suncor is naturally exposed to oil and gas prices. But Suncor is different. The emphasis has been on diversification and exposure to many different parts of the value chain, which reduces risk. It stabilizes cash flows from one quarter to the next because it reduces the impact of changes in oil and gas prices on cash flows.

Suncor’s oil and gas operations include a large network of downstream locations (refining) and an upstream segment (exploration and production). It also consists of 1,800 Petro Canada retail and wholesale locations across Canada. This means that the company is exposed to different parts of the oil and gas value chain. It also means that Suncor has the ability to make decisions at any time to take advantage of the most profitable area. And it means that Suncor isn’t as concerned about the WTI oil price as it is about the spread – or the difference between the prices of refined products and the prices of commodities (oil and gas).

Record operational performance

It’s tempting to believe that Suncor Energy’s recent share price performance will be followed by weakness. After all, the stock has broken records and is now trading at record highs. And it’s a commodity stock, so this can be seen as a sell signal.

However, as I discussed in the previous section, Suncor is not exactly a typical commodities or oil and gas company. But more than that: Suncor has broken records within its company. And I think that in itself can justify the stock price action. And I also think this means there are many more benefits to be had.

For example, in Suncor’s last quarter, production broke records. Its use broke records. Operating costs showed a downward trend, and this was of course also accompanied by record financial performance. Adjusted funds flow rose 1% from last year to $3.8 billion, despite lower oil prices. Adjusted cash flow per share increased 6% to $3.16 as a result of Suncor’s share repurchase program.

Additionally, the company’s earnings per share (EPS) for the quarter came in at $1.48, well above expectations of $1.08 and consistent with last year, despite oil prices being significantly lower.

The bottom line

Right now, Suncor Energy shares trade at just 14 times this year’s earnings and 6.2 times cash flow. In my opinion, the company’s momentum can be expected to continue. And while oil prices are important, it’s more complicated than that. Suncor’s returns have risen and the creation of shareholder value is therefore increasing. For dividend investors, Suncor stock currently yields 3.8% and is supported by relatively stable and predictable cash flows.