My Top Blue-Chip Pick In Oil/Gas: Suncor

Paul Franke profile picture
Paul Franke
18.02K Followers

Summary

  • Suncor is benefiting from the resurgence in oil/gas prices, and is expected to keep most of its operating gains beyond 2022.
  • It is the cheapest major integrated, North American asset name to buy in September, and less expensive than many cyclical E&P firms.
  • A dividend yield of roughly 4.5% is above-average for the sector, easily covered, and could grow substantially if oil/gas prices remain elevated.
  • If you want to add a "safer" somewhat conservative energy investment to your portfolio, Suncor is worthy of your research time.

Petro-Canada logo in front of one of their gas stations in Canada. Belonging to Suncor Energy, petro Canada is a petrol station brand spread in Canada"n

BalkansCat

Big energy names have been consolidating gains since the economic shock of Russia’s war against Ukraine put Europe in a bind for supplies. The initial upside oil/gas price reaction (based in fear) has been trying to rebalance supply/demand since April. In my personal trading, during September, I have moved from a bearish stance on a majority of petroleum production names into a more neutral outlook.

I would not categorize the current investment environment as entirely safe for many oil/gas outfits, but some sort of exposure to the sector seems to be warranted. Unlike the 2020 crude oil bust situation was an undeniably great time to purchase energy assets, I would categorize today's marketplace for fossil fuel stocks as extended in the cycle, but with possibly a few more innings to go (months or years).

When I review the raw numbers for earnings, cash flow, and dividends in 2022 and forecast into 2023 by Wall Street analysts, one name with superior diversification characteristics stands out as the cheapest long-term buy idea presently. Suncor (NYSE:SU), the largest Canadian energy company (by total assets), may be best positioned for rising oil/gas prices next year, if that is our future. It is the most intriguing buy proposition in the North American integrated oil space and matches up well for a valuation against exploration & production-only firms. If you leave past investment success, trading emotions, and favoritism at the door, I suggest the company as a solid core holding, risk-adjusted for its sizable and politically-safe reserve profile, running a breadth of upstream to downstream assets.

Background

I have talked about Suncor in the past on Seeking Alpha, initially many years ago in 2014 as a bullish investment idea in the important oil/gas sector. Total returns, including dividends and price appreciation, since this suggestion have been minimal, under +5% annualized. I also mentioned Suncor as a strong Canadian energy asset buy in May 2020 here, with much better gains achieved, above +100% for a total return over the last 28 months (almost +40% annualized).

However, I have been relatively bearish on big energy names since the Russian invasion of Ukraine. I even wrote articles on selling Occidental Petroleum (OXY) here and Chevron (CVX) here into summertime. Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) purchase spree in the two names effectively pushed them into an overvaluation zone vs. peers.

Well, crude oil prices have weakened off the $130 a barrel spike high in the spring and are now back into a more normal range of $80-85. Today, I find it hard to predict whether a global demand recession will pull price markedly lower, or further supply shocks this winter from Russia will keep balance tilted toward shortages. I suggested in early September here the use of United States Oil ETF (USO) units as a hedge in portfolio construction, with backwardation in the futures market helping support its price for the time being. In my research and analysis, the odds of sub-$70 crude and much lower natural gas pricing are about the same as another spike above $100 a barrel with $8+ per MMBtu natural gas sticking around through the winter months.

StockCharts.com - Light Crude Oil Nearest Futures, 18 Months of Daily Trading

StockCharts - Light Crude Oil Nearest Futures, 18 Months of Daily Trading

StockCharts.com - Natural Gas Nearest Futures, 18 Months of Daily Trading

StockCharts - Natural Gas Nearest Futures, 18 Months of Daily Trading

Superb Valuation Setup

Again, the main Suncor draw for me is raw cash generation vs. peers. There are a number of big oil names you can compare/contrast, and potentially acquire as a new shareholder. My argument is commodity businesses should be owned as a function of cash generation, longevity of assets (reserves), and safety considerations. This investment scores highly on all three.

Below is a graph of the basic price to trailing 12-month earnings ratio. Suncor is near the bottom of the list at 6x vs. its closest North American peers and competitors Imperial Oil (IMO), Cenovus Energy (CVE), Exxon Mobil (XOM), Chevron, BP p.l.c. (BP), Shell plc (SHEL), Occidental Petroleum, ConocoPhillips (COP), Pioneer Natural Resources (PXD), EOG Resources (EOG), and Devon Energy (DVN). Its forward 1-year outlook and valuation of 4.9x from Wall Street analysts is next to the cheapest.

YCharts, Big Energy P/Es - Past Year

YCharts, Big Energy P/Es - Past Year

YCharts, Big Energy Forward Projected P/Es - YTD

YCharts, Big Energy Forward Projected P/Es - YTD

But that’s only half the earnings story. What I like most is this low earnings valuation is also a function of the highest net profit margin (nearly 18%) of the largest “integrated” oil concerns, namely Chevron, Exxon, Imperial, Cenovus, Shell, and BP.

YCharts, Big Energy Trailing 12-Month Profit Margins - 1 Year

YCharts, Big Energy Trailing 12-Month Profit Margins - 1 Year

In addition, the Canadian giants of Suncor, Cenovus, and Imperial are witnessing the strongest earnings growth in 2022, with projections of cash generation remaining higher longer than other investment options in the oil/gas sector.

YCharts, Big Energy Projected EPS Growth - 2022-24

YCharts, Big Energy Projected EPS Growth - 2022-24

When you make balance sheet adjustments to the equity quote, from cash and debt held, Suncor looks even less expensive vs. the group. Enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) is approaching the lowest number of the big oil names, both on a trailing (3.4x) and forward (2.8x) basis.

YCharts, Big Energy EV to Trailing EBITDA - 1 Year

YCharts, Big Energy EV to Trailing EBITDA - 1 Year

YCharts, Big Energy EV to Forward EBITDA - 1 Year

YCharts, Big Energy EV to Forward EBITDA - 1 Year

Price and EV comparisons to free cash flow generation are also in the bottom quarter for a valuation (5.8x on price, 6.7x on EV). Everyone in the oil business is focused on “free” cash flow right now, and Suncor appears to be a terrific pick using this data point.

YCharts, Big Energy Price to Trailing Free Cash Flow - 1 Year

YCharts, Big Energy Price to Trailing Free Cash Flow - 1 Year

YCharts, Big Energy EV to Trailing Free Cash Flow - 1 Year

YCharts, Big Energy EV to Trailing Free Cash Flow - 1 Year

For long-term investors, the future stock price is important, but getting a cash dividend from oil investments has been a traditional reason to own them. In this respect, Suncor now sports the top trailing dividend yield at 4.45% of the major integrated giants. Devon and Pioneer have paid out more over the last 12 months as a percentage of today’s equity quote level, but they are less diversified and far more cyclical for earnings and distribution yields historically.

YCharts, Big Energy Trailing 12-Month Dividend Yields - 1 Year

YCharts, Big Energy Trailing 12-Month Dividend Yields - 1 Year

Finally, for the value-conscious investor, price to tangible book value for Suncor is nearly the best on the list. If you want to own hard assets backing up your investment, this Canadian oil investment has you covered better (close to par) than other major oil names outside of EOG, given a sector downturn.

YCharts, Big Energy Price to Tangible Book Value - 1 Year

YCharts, Big Energy Price to Tangible Book Value - 1 Year

Final Thoughts

For a summary of my buy thesis, Suncor is the bargain choice of the major integrated energy giants, especially after considering higher profit margins on sales and dividend payouts for a cash yield. Its assets are all located in super-safe North America, unlike many of its diversified rivals in the retail gas station, midstream processing/transportation, and E&P operating world.

If you are searching for a single investment with strong current profit/cash returns on investment and significant upside leverage to rising oil/gas commodity prices, I nominate Suncor as the leading choice for energy industry buying in September 2022.

The trading chart below shows concrete upside momentum in many of the indicators I track, and price support around $30 a share should hold (near the 200-day moving average), outside of a monster stock market decline in coming weeks.

StockCharts.com - SU, 18 Months of Daily Trading

StockCharts - SU, 18 Months of Daily Trading

I rate the stock a Buy, with Strong Buy territory closer to $26 given a deep recession and/or U.S. equity market wipeout into October-November. If you don’t already own Suncor and are wanting to increase your oil/gas exposure, my research suggests this investment could be a top choice for buyers today.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

This article was written by

Paul Franke profile picture
18.02K Followers
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of August 2022, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well-positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SU, USO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks or estimates herein are forward-looking statements and are based upon certain assumptions and should not be construed to be indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.

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