Suncor's Turnaround Is Underway And We Like It
Suncor Energy (SU) announced a strong third quarter. Both operating and financial performance exceeded analyst consensus expectations. Most importantly for shareholders, however, is that the company is now showing concrete evidence that new management is succeeding in turning Suncor around. We expect the improvement to become visibly sustainable, as the company's increasingly efficient operations result in strong cash flow generation and shareholder-oriented capital allocation.
Suncor shares are valued at 3.6-times 2024 EV/Debt-adjusted cash flow, assuming $80 per barrel WTI, versus its pre-2020 average of more than 6.0-times. Before 2020, the company was considered a “best-in-class” operator and as such, its shares traded at a significant premium multiple relative to peers.
Today, Suncor's halo is gone, but its Q3 results increase our confidence that it can return to its former top-tier performance. If it can, good things lie in store for its stock price. For context, today’s top operator, Canadian Natural Resources (CNQ), trades at 5.4-times 2024 EV/DACF. At that valuation, Suncor shares would trade at $64 per share. Suncor's shares will gain added benefit from the company's relatively clean balance sheet and its commitment to delivering capital to shareholders, both of which have improved dramatically relative to the pre-2020 timeframe.
We rate Suncor shares as a Buy and reiterate our $54 price target for the Canadian-listed shares and $40 price target for the U.S.-listed shares.