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Suncor Energy (TSX: SU) stock has frustrated its investors since the pandemic. The stock price fell from $40 levels in early 2020 to $22 levels in March 2020 and then below $16 in October 2020. Come August 2021, and the stock was still at $24 at a time when stock markets around the world had already recovered from their pandemic falls and were hitting new highs.
The company, one of Canada’s largest integrated energy companies, looks to have completely missed out on the crude oil rally. However, since August, Suncor has steadily moved up. It posted its numbers for Q3 2021 recently, and the stock has climbed up to $32.55 as of October 29. Is this the right time to get into Suncor? Will the stock hit its $40 pre-pandemic levels?
Strong Q3 Numbers
Suncor generated funds from operations of $2.6 billion for Q3 2021. In perhaps the strongest sign that the tide is turning for Suncor, Refining and Marketing (R&M) delivered $947 million in funds from operations for Q3 2021, “marking the third-highest results for third-quarter funds from operations on record.” In Q3 2020, the corresponding number was $594 million. Clearly, business sentiment is on the uptick. Total revenue at the end of the September quarter was $10.2 billion which is an increase of 58% compared to the same period in 2020.
Cash flow from operating activities came in at $4.7 billion compared to $1.24 billion in the corresponding quarter in 2020. Operating earnings came in at $1.04 billion compared to an operating loss of $338 million in Q3 2020. Net earnings came in at $877 million compared to a net loss of $12 million in Q3 2020.
Quarterly production also came in higher than expectations. The company hit 698,600 barrels of oil equivalent per day in Q3 2021, a 13% increase over the 616,200 barrels per day in the corresponding quarter in 2020.
This year, Suncor has been all about giving back to its shareholders. The company has reduced debt, repurchased shares, and perhaps most importantly doubled its dividend. As Mark Little, Suncor President and CEO said, “Since the start of 2021, we have returned $2.6 billion to our shareholders through share repurchases and dividends and have reduced net debt by $3.1 billion, demonstrating significant progress towards fortifying our balance sheet and meeting our capital allocation targets for the year.”
In Q3 2021, Suncor repurchased shares for $704 million and paid $309 million in dividends, and brought down net debt by $2 billion. The company now has $16.7 billion in debt at the end of Q3 2021.
Suncor also announced a quarterly dividend of $0.42 a share in Q3. This was a 100% increase to Q2 2021 and took the dividend back to 2019 levels. Why is the dividend doubling so important? That’s because Suncor’s shareholder base has traditionally been one that buys the stock for its excellent dividend record. In May 2020, when the company halved its dividend, it was a very unpopular move even though the company deemed it necessary. Now, with its forward dividend yield back to 5.16%, its investors are a happy lot.
4 Factors Powering Suncor
During the Q3 earnings call, Mark Little elaborated on the decision to double dividends and the confidence of the company in doing so. He said there were four factors behind this decision:
The confidence in the fact that business sentiment is improving and operations are back on track whether it is the maintenance program or the Fort Hills ramp up. Production at Fort Hills increased during Q3 2021 compared to Q3 2020. The ramp-up is managing over-burden removal and building iron ore inventory. “Fort Hills is expected to transition to a two-train operation and operate at full production rates by the end of the year,” according to the Q3 report.
The company’s downstream business is back on track. Suncor outperformed the Canadian refining average in Q3 2021, achieving 99% utilization at its refineries. Its funds from operations exceeded corresponding levels in 2019 in the downstream business.
Cash flow for Suncor is back on course as mentioned earlier in the article.
The company’s cash allocation is also back on course and is actually being accelerated. It has announced that it now plans to buy back around 7% of its outstanding shares.
Another factor not mentioned by Little is the fact that while the oil industry has experienced credit downgrades due to the COVID-19 pandemic, Suncor hasn’t taken a hit as the majority of its customers are large downstream companies with investment-grade credit ratings.
Based on all the above numbers and data, analysts are bullish on the stock. They have an average price target of $36.92 on the stock, which is a potential upside of 13.4% from its current price. When you factor in the 5.16% dividend yield, Suncor looks like a very attractive buy. It wouldn’t be out of bounds to say that Suncor could soon surpass the pre-pandemic highs in the coming quarters.
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