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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Suncor Energy

December 2nd 2019

Suncor Energy
NYSE Symbol: SU
Indsutry: Candiian Oil Sands
Price as of 11/30: $31.08 

 

The energy sector is once again having a disappointing year. The good news is the sector is positive for the year up 6%, but the downside is the sector is dramatically underperforming the S&P 500 and once again in last place among all sectors. Over the last 10 years, the sector is bringing up the rear with a 6% annual return, against 17.8% for the S&P 500 index and 22.7% for the market-leading technology sector.  The energy sector is down to a record-low 4% weighting in the S&P 500 and is worth less than the market value of Apple. As we come to the end of the year, many money managers and mutual fund managers will reevaluate their holdings and may shift more money to the energy sector. Global growth is expected to pick up next year. A trade deal with China would certainly help global growth. While the fundamentals may be finally improving, oil companies are emphasizing capital discipline and boosting returns to shareholders through dividends and stock buybacks. This week we will highlight one such oil company based in Canada. The featured stock of the week is Suncor Energy.

Suncor Energy is Canada's largest integrated energy company with enormous oil-sands reserves in the Canadian province of Alberta. Some call Suncor the Saudi Arabia of North America with some estimates of a century of oil-sands reserves. Suncor's costs keep coming down, spending only 30% to 40% of its annual cash flow to sustain its oil production. That's less than what conventional oil-and-gas companies spend. Suncor says it can spend enough to maintain output and sustain its dividend even if oil prices as measured by West Texas Intermediate fall to $45 a barrel. Suncor currently produces nearly 800,000 barrels of oil a day, with more than 85% coming from the Alberta tar sands with no exposure to the weak natural-gas market. Besides their oil, Suncor has a lucrative refining business with industry-leading margins that are more than double the average of U.S. peers. In addition, Suncor controls the network of Petro-Canada service stations and has a roughly 20% market share. Suncor's "downstream" businesses of refining and retail, accounted for more than half the company's earnings in the first nine months of 2019 providing a hedge against the upstream oil-production operations.

Suncor's stock currently trades for 15 times earnings, 1.6 times sales and 1.4 times book value of $21.3 a share. Suncor is one of the best income stocks in the energy space with a dividend yield of 4%. The downside risk to Suncor is a further drop in the price of oil, narrower refining margins and or an increase in environmental regulations. But at current valuations, Suncor looks like a great income stock with upside if demand and the price of oil rebound.