The quest for useful value in the stock market is one of those things that applies to any market condition – bull, bear, or none.
The current state of the market and the economy in general is what tends to shift the value focus from one sector to another. The last year and a half has been dominated by questions about inflation, interest rates, and the global, geopolitical concerns that continue to constrain supply and keep prices high. Inflation has remained strong enough to keep interest rising, which has had a downward effect on energy prices. Benchmark prices for U.S. and global crude have dropped for most of the past year from peaks early last summer at around $124 per barrel to its current levels in the low-$70 per barrel range. Industry experts predict crude price will reach an average price of $81 in 2024, suggesting that there is little downside to the commodity right now.
Some of the issues keeping oil prices elevated compared to 2020 and 2021 levels are global in nature, with serious geopolitical concerns. Russia’s war with Ukraine doesn’t have a near-term end in sight; that has kept pressure on the price not only of crude oil but also natural gas high, as Russia is a major global exporter of both commodities, and with a significant amount of pipeline capacity to get those products out of Russia and to the rest of the world running through Ukraine. Along with still-healthy levels of demand, and a U.S. administration that is reluctant to increase drilling and exploration capacity, that suggests that oil prices are likely to remain elevated for some time.
Increasing energy prices can be a bit of a mixed bag for stocks in the energy sector. On the one hand, they imply that demand is high, which should contribute to increased revenues; but when demand isn’t addressed by increased capacity, it can also have a reverse effect, especially on the companies that focus on exploration and production. Rising inflation also generally implies rising input costs in areas that affect just about all sectors. Rising labor costs are a good example of one of the things that a lot of businesses have been forced to contend with in the last two years in order to attract and keep workers.
Suncor Energy Inc. (SU) is an integrated energy company, based in Canada, with healthy cash flow and profitability metrics in place, but has also absorbed some impact from rising costs that have affected other areas like available cash. The stock saw an impressive rally from an August 2021 low at around $16 to a peak in June of last year above $42. From that point, the stock has dropped back into its own bear market, extending its downward trend to right now, with the stock’s price sitting below $30 per share. Does that suggest that the stock’s most recent price activity could translate to a useful opportunity for long-term oriented investors? Let’s find out.
Fundamental and Value Profile
Suncor Energy Inc. is a Canada-based integrated energy company. The Company’s segments include Oil Sands, Exploration and Production (E&P), and Refining and Marketing. The Oil Sands segment includes the Company’s owned operations in the Athabasca oil sands in Alberta to explore, develop and produce bitumen, synthetic crude oil and related products, through the recovery and upgrading of bitumen from mining and in situ operations. The E&P segment includes offshore activity in East Coast Canada, with interests in the Hibernia, Terra Nova, White Rose and Hebron oilfields, the exploration and production of crude oil and natural gas at Buzzard and Golden Eagle Area Development in the United Kingdom, and exploration and production of crude oil and gas at Oda. The Refining and Marketing segment includes the refining of crude oil products, and the distribution, marketing, transportation and risk management of refined and petrochemical products, and other purchased products. SU has a current market cap of $37.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -33.55%, while revenues grew by about -15%. In the last quarter, earnings decreased by a little more than -24% while sales were -11.2% lower. The company’s margin profile is healthy, and strengthening; over the last twelve months, Net Income as a percentage of Revenues was 14.18%, and increased to 16.74% in the last quarter.
Free Cash Flow: SU’s free cash flow is very healthy, at nearly $7.2 billion over the last twelve months. That marks a decrease from $8.3 billion in the last quarter, and from $8 billion a year ago. The current number translates to a Free Cash Flow Yield of 19.17%.
Debt to Equity: SU’s debt to equity is .25, which is a conservative number. The company’s balance sheet indicates that operating profits are more than adequate to service their debt, with good liquidity. Cash and liquid assets were about $833.8 million in the last quarter, while long-term debt was about $7.2 billion. It’s noteworthy that in the last nine months, liquidity has decreased by a little under $3 billion, attributable to the pay down of approximately the same amount of long-term debt over the same time period.
Dividend: SU’s annual divided is $1.53 per share, and translates to a yield of about 5.35% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $36.50 per share. That means that SU is undervalued right now, with about 27% upside from its current price. It is also worth noting that at the end of 2022, this same analysis yielded a fair value target at $41.60 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red diagonal line traces the stock’s downward trend from a 52-week high at around $43 per share in June 2022 to its low in September at around $26.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock appeared to be building a new upward trend from January through the start of March of this year before falling sharply back to its last major pivot low at around $29 per share, and which provided support until this month, when the stock broke below it to establish immediate resistance at $29. New, current support lies at the stock’s 52-week low at around $26.50. A push above $29 will see next resistance at about $31.50, but a push above that point could see the stock rally to about $32.50 if buying activity is strong enough. A drop below $26.50 could see the stock fall to about $25 before finding next support, using the current distance between support and resistance as a benchmark.
Near-term Keys: SU is an interesting stock in a sector that offers an interesting value proposition right now. This is a company with healthy free cash flow, and increasing profitability working in its favor. That makes SU a stock that could offer a good long-term opportunity for a value-focused investor. If you prefer to work with short-term trading strategies, you could use a push above $29 as a signal to think about buying the stock or working with call options, using $31.50 as a very quick-hit, bullish profit target and $32.50 possible if bullish momentum increases. A drop below $26.50, on the other hand could be a good signal to consider shorting the stock or buying put options, with a practical profit target at around $25 per share on a bearish trade.