BUSINESS
Suncor Energy Inc. operates as an integrated energy company. The company primarily focuses on developing petroleum resource basins in Canada’s Athabasca oil sands; explores, acquires, develops, produces, transports, refines, and markets crude oil in Canada and internationally; markets petroleum and petrochemical products under the Petro-Canada name primarily in Canada. It operates through Oil Sands; Exploration and Production; Refining and Marketing; and Corporate and Eliminations segments. The Oil Sands segment recovers bitumen from mining and in situ operations, and upgrades it into refinery feedstock and diesel fuel, or blends the bitumen with diluent for direct sale to market. The Exploration and Production segment is involved in offshore operations off the east coast of Canada and in the North Sea; and operating onshore assets in Libya and Syria.
INVESTMENT RATING
SU is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Suncor Energy has a current Value Trend Rating of A (Highest Rating).
The Value Trend Rating reflects complementary signals from PTR’s two proprietary measures of a stock’s attractiveness. Suncor Energy has a slightly positive Power Rating of 67 and a very high Appreciation Score of 91, and the Highest Value Trend Rating results.
Suncor Energy’s stock is selling well below targeted value. The current stock price of $38.36 compares to targeted value 12 months forward of $147.
Suncor Energy’s very high appreciation potential results in an appreciation score of 91 (only 9% of the universe has greater appreciation potential.)
Suncor Energy has a Power Rating of 67. (This slightly positive Power Rating indicates that SU’s chances of achieving attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: the Petroleum Refining comparison group is in a strong phase currently; and recent price action has been slightly favorable. An offsetting factor is earnings estimate behavior for SU has been slightly negative recently.
INVESTMENT PROFILE
SU’s financial strength is average. Financial strength rating is 59.
Relative to the S&P 500 Composite, Suncor Energy Inc. has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that SU is higher risk. Low financial leverage is a positive for SU. Relative weaknesses include: low forecasted profitability, low historical profitability, low expected growth, low historical growth, and high earnings variability. SU’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. SU has high market capitalization.
CURRENT SIGNALS
Suncor Energy’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
Suncor Energy’s current technical position is very strong. The stock price is in a 9.6 month up move. The stock has appreciated 37.2% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Suncor Energy Inc. (NYSE: SU) suffers from small negative changes in fundamentals: significant quarterly sales deceleration occurred.
The stock is currently rated A.
On 4/11/24, Suncor Energy Inc. (NYSE: SU) stock declined by -2.4%, closing at $38.36. This decline was accompanied by normal trading volume. Relative to the market the stock has been strong over the last nine months but is unchanged during the last week.
CASH FLOW
In 2023, Suncor Energy experienced a significant decline in cash of -$251 million (-13%). Sources of cash were lower than uses. Cash generated from 2023 EBITDA totaled +$15,932 million. Non-operating sources contributed +$2,654 million (+17% of EBITDA). Cash taxes consumed -$2,739 million (-17% of EBITDA). Re-investment in the business amounted to -$10,458 million (-66% of EBITDA). On a net basis, debt investors withdrew -$1,257 million (-8% of EBITDA) while equity investors pulled out -$4,383 million (-28% of EBITDA).
Suncor Energy’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Suncor Energy Peer Group. In most years, Suncor Energy was in the top quartile and second quartile. Currently, Suncor Energy is upper quartile at +17% of EBITDA (+$2,654 million).
Suncor Energy’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Suncor Energy Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Suncor Energy was in the top quartile and third quartile. Currently, Suncor Energy is at median at -17% of EBITDA (-$2,739 million).
Suncor Energy’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Suncor Energy Peer Group. In most years, Suncor Energy was in the lower quartile and top quartile. Currently, Suncor Energy is lower quartile at -66% of EBITDA (-$10,458 million).
Suncor Energy’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Suncor Energy Peer Group. In most years, Suncor Energy was in the second quartile and top quartile. Currently, Suncor Energy is substantially above median at -8% of EBITDA (-$1,257 million).
Suncor Energy’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Suncor Energy Peer Group. In most years, Suncor Energy was in the third quartile and top quartile. Currently, Suncor Energy is slightly above median at -28% of EBITDA (-$4,383 million).
Suncor Energy’s Change in Cash, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by a similar trend for the Suncor Energy Peer Group. (Since 2021 Change in Cash, %EBITDA has experienced a minor decline.) In most years, Suncor Energy was in the second quartile and lower quartile. Currently, Suncor Energy is substantially below median at -2% of EBITDA (-$251 million).
Suncor Energy’s Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Suncor Energy Peer Group. In most years, Suncor Energy was in the second quartile and lower quartile. Currently, Suncor Energy is lower quartile at +4%.
PROFITABILITY
Suncor Energy’s return on equity has improved very significantly since 2014. The current level of 19.2% is 2.95X the low for the period and is -16.9% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return and small positive trend in non-operating factors.
The productivity of Suncor Energy’s assets rose over the full period 2014-2023: asset turnover has enjoyed a very strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
Suncor Energy’s return on equity is at the upper quartile (19.2%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at the upper quartile (12.0%) reflecting asset turnover that is at median (0.55X) and pretax margin at the upper quartile (21.6%).
Tax “keep” rate (income tax management) is above median (78.3%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (2.05X).
GROWTH RATES
There are no significant differences between Suncor Energy’s longer term growth and growth in recent years.
Suncor Energy’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 9.4% per year.
Total asset growth has been 4.8% per year.
Annual E.P.S. growth has been 21.3% per year.
Equity growth has been 3.7% per year.
Suncor Energy’s consensus growth rate forecast (average of Wall Street analysts) is 4.0% — substantially below the average of the historical growth measures.
Relative to the Suncor Energy Peer Group, Suncor Energy’s historical growth measures are generally top quartile. E.P.S. growth (21.3%) has been upper quartile. Total asset growth (4.8%) has been upper quartile. Revenue growth (9.4%) has been at the upper quartile. Equity growth (3.7%) has been above median.
In contrast, consensus growth forecast (4.0%) is at the lower quartile.
PRICE HISTORY
Over the full time period, Suncor Energy’s stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Suncor Energy’s stock price rose +30%; relative to the market, this was a -60% loss. Significant price moves during the period: 1) August, 2021 – May, 2022: +117%; 2) October, 2020 – June, 2021: +112%; and 3) February, 2019 – October, 2020: -67%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 7.4% is slightly below median relative to the S&P 500 Composite.
In addition to being slightly below median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 7.4% is substantially below median relative to Suncor Energy Inc. Peer Group.
Current 5-year total return performance of 4.5% is substantially below median relative to the S&P 500 Composite.
Through February, 2024, with substantially below median current 5-year total return of 4.5% relative to S&P 500 Composite, Suncor Energy’s total return performance is slightly below median relative to Suncor Energy Inc. Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, SU’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the ratio of enterprise value/revenue, then by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor is the price/earnings ratio.
Relative to Suncor Energy Peer Group, SU’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is at the lower quartile. Ratio of enterprise value/revenue is near the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
Suncor Energy has a major value gap compared to the median valuation. For SU to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.33X to 2.16X. If SU’s ratio of enterprise value/revenue were to rise to 2.16X, its stock price would be lower by $32 to $70.
For SU to hit lower quartile valuation relative to the Suncor Energy Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.33X to 1.22X. If SU’s ratio of enterprise value/revenue were to fall to 1.22X, its stock price would decline by $-4 from the current level of $38.
VALUE TARGETS
SU is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Suncor Energy’s current Price Target of $144 represents a +276% change from the current price of $38.36.
This very high appreciation potential results in an appreciation score of 91 (only 9% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 91, the moderately high Power Rating of 67 contributes to an Value Trend Rating of A.
Suncor Energy’s current Price Target is $144 (+0% from the 2023 Target of $143 and +276% from the 04/11/24 price of $38.36). This plateau in the Target is the result of a +7% increase in the equity base and a -7% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
PTR’s return on equity forecast is 9.9% — slightly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well below the 2022 peak of 18%.
PTR’s growth forecast is 9.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2021 and 2023. The current forecast is well above the 2021 low of 3%.
PTR’s cost of equity forecast is 4.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is below the 2022 peak of 9.3%.
At Suncor Energy’s current price of $38.36, investors are placing a positive value of $2 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 14.0% per year, and a return on equity of 12.5% versus a cost of equity of 6.8%.
PTR’s 2025 Price Target of $144 is based on these forecasts and reflects an estimated value of existing assets of $47 and a value of future investments of $97.
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