Earlier this week, Suncor reported another explosive quarter, with record operating and financial performance. This has translated into strong and consistent shareholder value creation.
Since the earnings release, Suncor Energy’s share price has risen more than 6%. Is the stock a buy?
Another record quarter
Suncor is a highly differentiated name in the oil and gas industry. It has upstream assets, operates refining and modernization facilities and owns Petro Canada’s network of 1,800 retail and wholesale locations. What this means is that Suncor is diversified across the oil and gas value chain. This benefits Suncor and its shareholders by encouraging consistent and steady cash flows.
In Suncor’s third quarter, we again saw the benefits of its diversified business. We also saw the benefits of a culture of operational excellence. As production increased, costs decreased. The cash flows and margins therefore rose nicely. Management’s focus on return on capital was once again fully reflected.
Upstream production reached 870,000 barrels per day (bpd), the best third quarter ever. Upgrader usage was 102%. And refining throughput of 492,000 barrels per day was another record. The key point I want to make here is that even with these increases in production and throughput, Suncor’s operating costs came in at $9.7 billion – flat from last year. This is real value creation.
Value and performance
Despite reporting another record quarter, with record operating and financial performance, it appears that Suncor continues to be undervalued by the market. Are Suncor’s past problems to blame? Are investors still skeptical? What needs to change for Suncor’s share price to reflect its inherent value?
I do think investors are probably still skeptical when it comes to Suncor. And herein lies the opportunity: because this skepticism is misplaced, as Suncor has turned things around in spectacular fashion. This is evident from Suncor’s financial and operational performance in recent years. But what will it take for investors to take notice?
The answer, I think, is simply time and Suncor continues to do what it has been doing for the past few years. If Suncor can continue to deliver on its expectations, which call for strong performance, it is highly likely that Suncor’s stock will receive a higher rating.
Valuation
Meanwhile, Suncor continues to create value for its shareholders. In the past three years, the stock has risen 26%. As you can see in the chart below, the stock has performed well over the past five years, up almost 230%.
Furthermore, Suncor Energy stock has a lot to offer dividend investors, with a yield of over 4% and strong dividend growth. In fact, the annual dividend has increased 36% over the past three years – for a compound annual growth rate (CAGR) of almost 11%.
Yet Suncor Energy shares are still cheap, trading at just 13.5 times this year’s expected earnings and 1.6 times book value. It seems to me that Suncor’s strong cash flow and earnings growth profiles, along with its strong balance sheet and returns, deserve a higher valuation.
The bottom line
A good rule of thumb when it comes to investing is to look for quality companies that deliver real value to shareholders. This is what we see at Suncor. Although it is an oil and gas company and therefore exposed to commodity prices, the company has created a business that minimizes risk and volatility and maximizes returns.
#Suncor #Stock #Buy #Quarter #Earnings