Investors who missed the recent rally in Suncor stock are left wondering if it’s still undervalued and a good buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
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Current Stock Performance
Suncor trades near $53.50 as of this writing. The stock has jumped 8% in recent days due to a spike in oil prices driven by geopolitical concerns, reversing an extended decline in oil prices over the past six months.
Market Volatility
Volatility is common in the oil market. Recently, oil bears have gained traction as global supply from both OPEC and non-OPEC producers has risen, coupled with a weakening demand outlook, particularly from China. This situation led the price of West Texas Intermediate oil to fall from US$86 per barrel in April to as low as US$66.
The latest spike in oil prices is attributed to increased tensions between Israel and Iran. Traders are concerned about potential impacts on oil infrastructure and the Strait of Hormuz, where a significant percentage of global oil deliveries pass. Some analysts warn that worst-case scenarios could push oil prices to US$200 per barrel.
Operational Results
Suncor has made strategic changes since appointing a new CEO in 2023. The company has cut costs, divested its wind farms, and boosted production to a record 803,000 barrels per day in the first half of the year. Plans are in place to increase production by another 100,000 barrels per day by 2026, and Suncor is actively using excess cash for debt reduction and stock buybacks.
In Q2 alone, Suncor spent $825 million on share repurchases and plans to allocate 75% of excess funds for this purpose, increasing to 100% once net debt falls to $8 billion. As of June 30, net debt was $9.05 billion, down about $500 million from the previous quarter.
Future Outlook
The opening of the Trans Mountain pipeline expansion is positive for Suncor, providing better access to global markets and alleviating previous pipeline bottlenecks. These developments, combined with increasing production, are expected to enhance profitability in the coming years.
Dividend Considerations
For 2024, Suncor raised its dividend by 5%, yielding approximately 4% at the current share price. This payout is higher than pre-pandemic levels, which may restore confidence among long-time investors who were upset by previous cuts.
Is It Time to Buy?
Owning Canadian oil stocks requires a bullish outlook on oil. If you believe in a strong oil market, Suncor appears to be a solid choice, offering a decent dividend to weather market fluctuations. However, if you consider geopolitical risks to be exaggerated, you might want to explore other investment opportunities. A potential global recession and abundant oil supplies could pressure prices in the coming year, possibly affecting Suncor’s stock performance.
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This article reflects the writer’s opinion and may not align with the official recommendations of any advisory service.