On today’s Breakouts report, there are 28 stocks on the positive breakouts list (stocks with positive price momentum), and 41 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the positive breakouts list just three weeks ago - Suncor Energy Inc. (SU-T). However, in recent weeks the share price has come under significant pressure with the rapid spread of Omicron and fear of slowing global economic activity. This continued weakness in the share price may soon represent a buying opportunity for certain investors within a diversified portfolio. The stock has 16 buy recommendations and an anticipated average one–year total return, including the 5.6-per-cent dividend yield, of 40 per cent.
A brief outline on Suncor is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Calgary-based Suncor is an integrated oil company focused on its oil sands operations in the Athabasca region in northern Alberta. The company also processes oil sands crude into refined products (e.g. gasoline and distillates) with refineries located in Alberta, Ontario, Quebec and Colorado.
The stock is dual-listed, trading on the Toronto Stock Exchange and the New York Stock Exchange under the same ticker, SU.
Investment thesis
- Despite near-term commodity price weakness, oil prices remain elevated. Suncor’s production is 100-per-cent oil.
- Supply discipline in the industry – supportive of elevated oil prices.
- Long-life, low-decline assets.
- Industry leadership. One of Canada’s largest retailers (Petro-Canada gas stations) with approximately 20 per cent market share.
- Focus on reducing operating costs and lowering its operating breakeven.
- Synergies from the Syncrude joint venture (59-per-cent working interest). Targeting total annual synergies of $300-million by the end of 2023.
- Higher oil production from Fort Hills (54 per cent working interest) with the ramp-up of a second train.
- Accelerated debt reduction, strengthening its balance sheet. On the third-quarter earnings call, chief financial officer Alister Cowan remarked, “Free cash flow, after CapEx [capital spending] and dividends, will be allocated 50 per cent to buybacks and 50 per cent to debt reduction next year. That will be pretty consistent going forward.”
- Attractive dividend yield of over 5 per cent.
- Accelerated share buybacks. Increased its share buyback program to up to 7 per cent from 5 per cent (highest buyback rate in the company’s history).
- Targets being net-zero greenhouse gas emissions by 2050 with a 30 per cent reduction in emissions by 2030 (e.g. investing in low carbon technologies to reduce CO2 emissions).
- Key risks to consider:1) volatility in oil prices; 2) rapid global spread of Omicron slowing oil demand (economic slowdown and people staying at home); 3) rising Canadian dollar; 4) higher natural gas prices (i.e. higher costs); 5) high carbon dioxide emitter, and 6) narrowing differentials between average sweet and heavy oil.
Industry outlook
The December Oil Market Report released by the International Energy Agency (IEA) provided a positive outlook for oil, “The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway. Global oil demand is forecast to grow by 5.4 mb/d in 2021 and a further 3.3 mb/d next year, when it rebounds to pre-Covid levels at 99.5 mb/d. New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns. As a result, we expect demand for road transport fuels and petrochemical feedstocks to continue to post healthy growth. However, due to new restrictions on international travel, we have revised down our global oil demand forecast for 2021 and 2022 by 100 kb/d on average, primarily to account for reduced jet fuel use.”
Quarterly earnings and 2022 outlook
After the market closed on Oct. 27, the company reported its third-quarter financial results. Cash flow per share came in at $1.79, above the consensus estimate of $1.75. At quarter-end, net debt-to-funds from operations stood at 2 times. The share price surged 12 per cent the following trading day on high volume.
On Dec. 13, the company provided its 2022 production outlook and capital spending plan. Management anticipates upstream production to be between 750,000 and 790,000 barrels of oil equivalent per day, up roughly 5 per cent year-over-year.Production from its Oil Sands Operations is anticipated to be between 395,000 and 435,000 barrels per day with operating costs per barrel of between $25 and $28. Net production from Fort Hills is expected to be between 85,000 and 100,000 barrels per day with operating costs per barrel of between $23 and $27. Management is guiding to Syncrude’s production of between 175,000 to 190,000 barrels per day with operating costs per barrel of between $31 and $34. Looking at its anticipated downstream throughput in 2022, this is expected to be between 430,000 and 445,000 barrels per day. Management’s capital spending guidance is $4.7-billion.
On Feb. 9, the company will be releasing its fourth-quarter financial results after the market closes. According to Bloomberg, the consensus cash flow per share estimate is $2.27.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 42 cents per share, or $1.68 per share on a yearly basis. This equates to an attractive current annualized yield of 5.6 per cent.
In Oct., management announced that it was increasing its annual dividend to $1.68 per share, a 100 per cent bump, which returned the dividend to 2019 levels.
In the third-quarter, the company repurchased $704 million of shares.
Analysts’ recommendations
There are 22 firms that provide research coverage on this company, of which 16 analysts have buy recommendations, and six analysts have neutral recommendations.
The firms providing research coverage on the company are: ARC Independent Research, ATB Capital Markets, BMO Nesbitt Burns, CIBC World Markets, Credit Suisse, Desjardins Securities, Eight Capital, Evercore ISI, Goldman Sachs, ISS-EVA, JP Morgan, Morgan Stanley, National Bank Financial, Peters & Co., Raymond James, RBC Dominion Securities, Scotia Capital, TD Securities, Tudor Pickering, Veritas Securities, Wells Fargo and Zacks.
Revised recommendations
Month-to-date, three analysts have revised their expectations.
- Desjardins Justin Bouchard raised his target price by $1 to $42 and maintained his “buy’ call.
- J.P. Morgan’s Phil Gresh increased his target price to $42 from $39 and maintained his “overweight” recommendation.
- Peters’ Tyler Reardon hiked his target price to $40 from $36 and held his recommendation at a “sector outperform.”
Financial forecasts
According to Bloomberg, the consensus cash flow per share estimates are $7.06 in 2021, rising 25 per cent to $8.85 in 2022.
Cash flow per share forecasts have been rising. For instance, three months ago, the consensus estimates were $6.99 for 2021 and $8.05 for 2022.
Valuation
Analysts commonly value the stock on an enterprise value-to-debt adjusted cash flow basis.
The one-year average target price is $40.24, suggesting there is 35 per cent upside in the share price over the next 12 months. If you include dividend yield, this represents a potential total return of 40 per cent.
Insider transaction activity
Quarter-to-date, only one insider has reported trading activity in the public market.
On Nov. 1, Russ Girling invested over $245,000 in shares of Suncor. He bought a total of 7,500 shares for two accounts in which he has control or direction over at an average price per share of approximately $32.73.
In May, Mr. Girling was appointed to the company’s board of directors.
Chart watch
Year-to-date, the share price has rallied 40 per cent, slightly above the 35.7-per-cent gain for the S&P/TSX energy index.
In terms of key resistance and support levels, the stock price has major resistance around $34, near its 2021 closing high of $34.02 set on Nov. 25. Should the share price continue to fall in the near-term, there is initial downside support around $28, near its 200-day moving average (at $27.85).
This report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty