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Is Suncor Energy Inc. a Buy?

By Matthew DiLallo – Apr 2, 2018 at 1:05PM

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While the Canadian oil giant has already had a good run over the past year, this one catalyst could fuel continued outperformance.

Suncor Energy (SU 4.50%) has bucked the trend of most oil stocks over the past year by rising more than 12%. That gain is both better than the S&P 500 -- which is up less than 12% over that time frame -- and most other oil stocks considering that the average one has declined about 5% over the last year even though oil has risen nearly 30%. While a lot has gone right for Suncor in the past year, one factor in particular seems to have fueled that outperformance: buybacks.

With the company recently reloading its repurchase program, shares could have further to run, making the stock look like a good one to consider buying especially with the growth it still has up ahead.

A worker's gloved hands showing an oil sands sample from a mine.

Image source: Getty Images.

Cashing in on the recovery

Suncor Energy finished 2017 on a high note, generating slightly more than 3 billion Canadian dollars ($2.3 billion) in funds from operations (FFO), which was a new quarterly record for the company. Fueling that strong performance was an improvement in oil prices and operating costs, with the latter falling to the lowest level in more than a decade. Because of that, Suncor Energy generated enough cash to fund its investment program, with plenty left over to retire debt, pay its dividend, and repurchase CA$800 million ($621 million) in shares, bringing its full-year buyback total to more than CA$1.4 billion ($1.1 billion). 

It was also a milestone year for Suncor because it completed two major growth projects in the fourth quarter, which position the company to deliver a 9% compound annual growth rate in production per share through 2020. That rising output, when combined with improving oil prices and costs, should drive free cash flow even higher in the coming years. Because of that, Suncor recently announced a 12.5% dividend increase and authorized another CA$2 billion ($1.6 billion) in share repurchases. 

A person handing over cash.

Image source: Getty Images.

Buybacks: The key to continued outperformance

Suncor Energy started returning more cash to investors about a year ago when it authorized a CA$2 billion ($1.6 billion) share repurchase program and a 10% dividend increase. Since that announcement, shares have been up nearly 13% while most other rivals have dropped in value. We've seen similar outperformance from other oil companies that have also announced increased capital returns to investors over the past year. 

ConocoPhillips (COP 5.14%) was one of the first to put a priority on sending more cash back to shareholders when it unveiled a $3 billion buyback program back in November 2016. Since then, the U.S. oil giant has gone on to repurchase that entire amount and planned to buy back another $2 billion in stock this year and up to $7.5 billion by 2020. This repurchase program has already paid big dividends for ConocoPhillips' investors considering that shares are up more than 32% since it made the initial announcement versus a 5% decline in energy stocks. Fellow U.S. oil giant Anadarko Petroleum (APC) has also been aggressively buying back its shares in recent months, authorizing a $2.5 billion program last September. Since that announcement, Anadarko's stock has been up nearly 35%. It could have further to run considering that Anadarko added another $500 million to its authorization earlier this year. 

While all three of these oil stocks are growing production and cash flow, so are most other rivals. The only difference is that this trio has aggressively repurchased their stock over the past year, which seems to be the key to creating value for investors in this environment.

2 billion more reasons to buy

Suncor Energy's nearly CA$2 billion ($1.6 billion) in share repurchases over the past year appears to be the primary fuel driving its outperformance. With the company recently reloading that program with another CA$2 billion ($1.6 billion), it could continue outperforming in the coming year. That catalyst gives Suncor an edge on most rivals, making it one of the top oil stocks to consider buying.

Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Suncor Energy Inc. Stock Quote
Suncor Energy Inc.
$32.02 (4.50%) $1.38
ConocoPhillips Stock Quote
$115.62 (5.14%) $5.65
Anadarko Petroleum Corporation Stock Quote
Anadarko Petroleum Corporation

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