Suncor Energy Inc.’s (SU - Free Report) shares have scaled a 52-week high of $41.26 in yesterday’s trading session, before closing a tad lower at $41.15, generating a healthy year-to-date rate of more than 12%.
Notably, the stock has had a good run in the market over the past year with its shares increasing 28.6%, outperforming its industry’s growth of more than 24.2% in the same time frame.
We believe that this Zacks Rank #3 (Hold) company still has upside potential, as is apparent from a VGM Score of A and long-term earnings growth rate of 8.50%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s delve deeper to analyze what’s driving the stock.
Suncor Gains Traction from Solid 1Q’18 Results
Since the release of Suncor’s results on May 2, 2018, its shares have moved up 8.4%. The integrated oil company delivered better-than-expected earnings in the first quarter on strong refining margins and remarkable refinery utilization of 98%, along with rebounding crude prices. Both the bottom and top lines witnessed year-over-year growth of 29.7% and 16.8%, respectively.
One of the factors that is essentially fueling the company’s outperformance is its commitment toward dividend payouts and share repurchase programs. The Canadian oil giant ended 2017 on a high note owing to operational efficiency and recovering energy landscape, thereby generating enough to fund its full-year buyback to more than C$1.4 billion.
Amid the industry downturn, while many energy companies slashed their dividend payouts, Suncor has remained a notable exception, continuing to hike its dividend for 16 consecutive years. Early this year, the company brought in good news for the shareholders by announcing a 12.5% dividend hike. Being confident of its strong cash-flow generation ability, it also authorized another C$2 billion of stock buybacks.
In the last reported quarter, the company returned C$590 million to its shareholders through dividends and bought back C$389 million of outstanding shares.
Robust Portfolio and Prudent Management
Suncor boasts an impressive supply chain network, owning to significant oil sands and conventional production platform, along with a strong downstream portfolio, having a network of more than 1500 Petro-Canada retail and wholesale outlets. This makes the company less exposed to the volatile commodity market.
Following the $15 billion Petro-Canada acquisition in 2009, Suncor has become one of the largest owners of oil sands in the world. The company’s asset base includes substantial conventional reserves and production at offshore Eastern Canada and in the North Sea, which generates strong margins and should provide free cash flow to fund future oil-sands expansion.
With Suncor’s business model focused on upstream oil sands operation, midstream as well as refining/marketing, the company has been one of the most resilient energy players even during the oil slump. Notably, the company surpassed earnings estimates in three out of the last four quarters, delivering an average positive surprise of 10.35%.
Management has done a good job strengthening its financial metrics during the downturn, through its aggressive expense management. This has helped the company to cash in on the recovering oil market more effectively. The company’s modest leverage ratio of around 23% has provided it financial flexibility to tap on the growth opportunities.
Strategic Buyouts and Sell-Offs
Suncor is making smart moves through a serious of acquisitions of late that are expected to further strengthen its growth momentum. In 2016, the company’s acquisition of rival Canadian Oil Sands, in a $6.6 billion deal, has helped Suncor further expand in the region and increase its hold in the Syncrude project.
Early this year, the company expanded its ownership in the Syncrude project by buying additional 5% interest from its partner Mocal Energy for C$920 million, raising Suncor’s total stake to 58.74% and adding 17,500 barrels of oil equivalent to its production portfolio.
Suncor further acquired 17.5% interest in the Fenja Development from Faroe Petroleum this year, adding a lesser-risked asset in its offshore portfolio. Finally, it also acquired additional working interest in the Fort Hills oil sands project from TOTAL S.A. (TOT - Free Report) .
Notably, the Fort Hills project netted 29,800 barrels per day to Suncor in the recent quarter. The second extraction train at Fort Hills came online at the end of the first quarter, which is expected to further ramp up the production capacity. The project’s third train will also come online by the end of May, allowing Suncor to reach full 190,000 barrels per day capacity earlier than expected.
Further, the company has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. Last year, the company sold off its Petro-Canada lubricants business to Dallas-based HollyFrontier Corp. (HFC - Free Report) for more $1.13 billion.
Amid the uncertain regulatory environment in Canada, the company does not have many new projects in the pipeline. However, its focus on ramping up its production to wring more oil especially at its Fort Hills and Hebron projects throughout 2018 bodes well.
Moreover, with oil sands cash operating costs falling drastically in the recent years (from $37 a barrel in 2013 to $23.80 a barrel in 2017), it has room for growth owing to smart buyouts and diversified business model. Its dividend and buyback programs also give it an edge over most of its rivals including Cenovus Energy Inc. (CVE - Free Report) among others.
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