Blog: Only Fools Rush In

“Only fools rush in” is a great lyric from the King of Rock, Elvis Presley, and also happens to be wise words for investors like us to live by.

Many years ago, while I was still a young student studying law, I owned shares of Suncor. Take my word for it that as a student, I did not have a diversified portfolio. During the Arab Spring, the price of oil shot up and I sold my entire position somewhere near $47/share. Over 12 years later, the price hasn’t moved a penny. As of this writing, it trades at $46.30/share.

Suncor’s major problem is inexcusable. The company needs to improve its safety record. It has suffered far too many worker fatalities when it shouldn’t have any. Consequently, its previous CEO – Mark Little – resigned from his position last year.

Energy stocks have suffered from dismal performance over the last decade. Because of ESG concerns and an abundance of supply, the sector could not catch a bid. Fortunes changed in 2022 and the sector was the best performer in the market.

Suncor, however, continued to lag.

On December 12, we bought the stock for our clients. Our purchase price was $41/share. Today, it trades at $46.50/share, up about 13%.

There are several reasons why we bought the stock.

First and foremost, it had declined 15% in the month leading up to our purchase (hence the title of this blog). We are contrarians and look for stocks that are beaten up and out of favour.

Second, Suncor has lagged its closest peer, Canadian Natural Resources (“CNQ”). At the time we bought Suncor, it was shocking how drastically the stock had underperformed. Since the stock market bottomed during the financial crisis on March 9, 2009, CNQ had appreciated 240% compared to Suncor’s meager 53% growth. We expect that trend to reverse. It’s still early days but since our purchase, Suncor has outperformed CNQ (+13% compared to CNQ’s +6%) and the reversal is just getting started. We weren’t the only ones who noticed to poor performance over the last 14 years. Activist investors at Elliot Asset Management purchased the stock and advocated change.

Third, its 5.2% dividend yield provides lots of income for our clients. While the company slashed its dividend by over 50% at the start of the pandemic from $1.86/share to $0.84/share, it has fully restored the payout, which now sits at $2.08/share.

Fourth, the sector has found religion and presently returns oodles of cash to its shareholders. For years and years, oil companies focused on expanding production and ignored it shareholders. That has since changed. Suncor repurchased 7% of its own stock in the first three quarters of 2022. The company expects to hit their debt target of $12 billion this quarter. Once that happens, it will return 75% of its free cash flow to investors. Once it hits $9 billion (most think that will happen by the summer), it will return 100% of free cash flow to investors.

We don’t expect the price of oil to drop below $70/barrel. This is because the U.S. has indicated it will purchase the commodity at that price to refill their Strategic Petroleum Reserve (SPR) that it tapped into throughout 2021 and 2022 to lower the price of energy. Suncor’s breakeven price to fund its operations and maintain its dividend is only $45/barrel.

After underperforming CNQ for many years, it is now time for Suncor to have its day.