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Suncor Energy Inc. (SU.to) is one of Canada's leading integrated energy companies who business has been decimated in recent months.
Its future oil sands growth projects are not economical in the current low-oil-price environment and the timing of expansion is highly uncertain.
I am a strong proponent of spreading money across 5 main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities. If you wish to have exposure to the oil and gas sector, I would not invest in Suncor.
I also encourage investors to take into consideration their personal circumstances when making investment decisions. Failure to do so could result in unintended over exposure to a certain industry.
Summary
- Suncor is one of Canada’s leading integrated energy companies.
- Its future oil sands growth projects are not economical in the current low-oil-price environment.
- Earlier in 2020, SU slashed its dividend as part of its efforts to converse cash.
- Guidance is weak and just recently SU announced plans to significantly reduce its workforce.
- Investors are wise to spread their money across 5 main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities.
- With so many investment opportunities within these 5 economic sectors I would not consider investing in SU.
Introduction
I recently received the following inquiry from someone residing in the province of Alberta.
‘What do you think of Suncor (SU.to) stock? It hasn’t been this low since 2003.’
For the sake of full disclosure, I have never held a position in SU, I have not closely followed it, and based on the analysis I have undertaken for this article…would not remotely consider investing in it.
The inquiry came from someone who likely fits the mold of many Albertans where:
- they reside in a province which is heavily dependent on the oil and gas industry;
- employment is heavily dependent on Alberta’s oil and gas industry;
- a sizable percentage of the family’s net worth might be in their principal residence;
- has a limited knowledge about investing in equities.
Without even delving into SU.to’s numbers, my immediate take on the situation is that an investment in this company by this investor would be extremely unwise. Merely looking at a company’s stock price relative to historical levels is definitely not the way to make an investment decision. A company's stock price tells you what the investors are prepared to pay to acquire a share in a company. It certainly does not give you any indication as to the value of a company.
Although I quickly determined this would be a totally inappropriate investment for this individual without looking at the numbers, let’s have a very quick look at some of the data I reviewed for the purpose of writing this article.
Business Overview
I encourage you to read the Business Overview section of the company’s website.
Q2 2020 and YTD Results
The most recent quarterly financials can be viewed in the Q2 results as at June 30, 2020. I caution you, however, that circumstances have deteriorated in Q3 which ended September 30th so the picture painted in the Q2 numbers is very likely much worse. In fact, on September 7th, the company issued the following guidance and more recently we see that it announced plans to cut about 2,000 jobs, 10-15% of its workforce. This is in addition to previously announced reductions in CAPEX earlier in 2020!
Credit Ratings
If we look at Item 20 - Debt and Credit Facilities which commences on page 34 of 55 in the FY2019 Financial Statements and Notes, we see a schedule of the company’s long-term debt.
Looking at the company’s Q2 2020 results found here we see Item 6 – Financial Condition and Liquidity commencing on page 32 of 76:
‘SU issued $1.25 billion of 5.00% senior 10-year unsecured medium term notes, US$450 million of 2.80% senior 3-year unsecured notes and US$550 million of 3.10% senior 5-year unsecured notes. The company also enhanced its liquidity by securing an additional $300 million of credit facilities and, as at June 30, 2020, had $8.65 billion of liquidity.’
In Q2 2020, Moody’s affirmed the company’s senior unsecured long-term debt Baa1 (the top tier of the lower medium grade which is investment grade).
In March 2020, S&P Global rated SU.to’s long-term debt BBB+ (comparable to Moody’s Baa1 rating) and last reviewed it in August at which time it deemed the outlook as stable.
In Q2, Dominion Bond Rating Service (DBRS) resolved the Under Review with Negative Implications status and affirmed the company’s A (low) rating with a Negative outlook, on long-term debt, and affirmed the company’s R-1 (low) rating, on its Canadian short-term debt.
While the long-debt ratings reflected above are acceptable from my perspective it remains to be seen whether these ratings remain in effect if business conditions deteriorated and industry weakness persists. The company’s debt load has already grown subsequent to the end of Q2 so ‘going to the well again’ is unlikely. Now, SU needs to slash expenses, possibly cut the dividend again, and/or issue more equity if the current business environment remains weak for longer than management anticipates.
Valuation
To determine a company’s valuation I look at current earnings and guidance which is generally in the form of adjusted earnings. In the case of SU…there is no point in looking at historical earnings since the past does not reflect the present environment.
Looking at one of my sources, guidance calls for ($1.43)/share in adjusted earnings for FY2020. This guidance is on the basis of input from 12 analysts with a range of ($2.12) to ($1.12). Guidance for FY2021 from 16 analysts is $0.59 with a range of ($0.31) to $2.13; I am very reluctant to place any reliance on FY2021 guidance.
I think it is far too difficult to properly value SU in the current environment. Since I would not remotely consider investing in this company I am not prepared to make any attempt to calculate a reasonable share price for this company.
Some investors rely heavily/exclusively on dividend yield which is no way in which an investment should be made.
In the case of SU we have a company whose $0.21/quarter dividend generates a dividend yield of ~5.27% on the basis of the current $15.95/share price. While certainly attractive, investors would be wise to take into consideration that the company cut its quarterly dividend from $0.465 in May 2020; that is a ~55% haircut.
As far as share repurchases go in the foreseeable future…highly unlikely. SU should not be using its liquidity for this purpose. In fact, if business conditions remain weak for a prolonged timeframe I would not be surprised if it issued more shares.
Final Thoughts
Analysts try to determine a company’s fair value to determine whether a company appears to be undervalued/fairly valued/overvalued. Based on my sources, the consensus is that the company is ~45% undervalued. I am very reluctant to place any credence in consensus guidance for this company given the extreme headwinds this company faces.
I would much rather invest in companies with a track record of profitability where you can determine valuation without hoping that a host of assumptions pan out. I also want to invest in companies with positive free cash flow and a steadily increasing dividend…not in a company which has had to cut its dividend and another dividend cut should not be ruled out.
I am a strong proponent of spreading your money out across most, if not all, of the five main economic sectors:
- Manufacturing & Industry
- Resources & Commodities
- Consumer
- Finance
- Utilities
With this in mind, it is beyond me why one would even contemplate an investment in SU.to.
I want exposure to the oil and gas sector and my analysis has led me to make Chevron Corporation (CVX) my preferred investment. It is a far superior company than SU.to and, in fact, its long-term credit ratings from Moody’s (Aa2) and S&P Global (AA) are 5 brackets higher than SU.to!
Even from a dividend yield perspective, CVX currently has a yield of 7.33% which is in excess of 2% than that of SU.to. If you are like me and hold CVX shares in non-registered accounts, your $1.29/quarterly dividend incurs a 15% withholding tax and you end up with ~$1.10/share/quarter or ~$4.40/share/year. On the basis of the current $71.19 share price your dividend yield is ~6.2% which still exceeds SU.to’s dividend yield.
Having said all this, investment decisions go just beyond the numbers and it is important you take into consideration personal factors such as those I mention at the beginning of the article. In my opinion, investors who fit the mold I presented at the beginning of this article would be wise to invest in other sectors and to look at some of the names reflected here.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I do not currently have exposure to SU.to and have no intention of initiating a position in the foreseeable future. I am long CVX.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
