A gain of 68% over the course of the past year is the type of return investors would normally be thrilled about. The problem for Canadian oil giant Suncor Energy (SU -0.20%) is that this return, while impressive, lags those of its peers like Canadian Natural Resources and Cenovus, which have posted gains of 104% and 138%, respectively, over the same time frame.
This gap has attracted the attention of activist investor Elliott Management, which has taken a 3.7% stake in the company . Elliott is a large hedge fund (with over $50 billion in assets under management) that is known for getting involved in companies that it feels are underperforming and pushing for changes. Elliott is calling for the appointment of five new independent directors; asking Suncor to consider selling assets, such as its Petro-Canada gas stations; and increasing its returns to shareholders by increasing them from 50% of discretionary cash flow to 80%. Elliott thinks that shares of Suncor could be worth 65% more than where they are currently priced.
Looking at a one-year stock performance and comparing it to peers is probably short sighted. But zooming out over a five-year time frame, Suncor has gained 15%. Cenovus has gained 87% over this time, while Canadian Natural Resources has posted a similar 94% gain, so Elliott is not out of bounds in this comparison. Note that Suncor's gain over both of these time horizons includes Thursday's 12% jump on news of Elliott's involvement; otherwise this gap would be wider. As Elliott highlighted in its presentation, Suncor used to trade at a premium valuation to Canadian Natural Resources and also had a larger market cap -- now Canadian Natural Resources has surpassed Suncor both in market cap and on its enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) valuation.
Dividend payout is solid but could be even better
Elliott will agitate for these changes that it thinks should benefit Suncor shareholders. In the meantime, Suncor looks attractive based on its solid dividend yield of 3.6% (which could increase further based on Elliott's recommendations). The thing that I like about Suncor is that it has a break-even cost of just $30 per barrel of oil. Including paying the current dividend, its break-even cost per barrel is $35. With oil hovering around the $100 mark for much of 2022 thus far, this extra $65 or so is all cash that is flowing through to Suncor's bottom line. This excess cash can be used to engage in shareholder-friendly activities like share buybacks or further dividend increases. Even if oil were to fall to $70, Suncor would still be in a comfortable position with oil going for twice the company's break-even cost.
Suncor looks inexpensive compared to the market as a whole. It trades at 16.2 times earnings but only 6.3 times next year's earnings and a very cheap 4.3 times EV/EBITDA.
Is Suncor a buy?
Based on its attractive valuation, solid dividend payout, and the involvement of a prominent activist investor seeking shareholder-friendly changes, I view Suncor as a long-term buy. Whether Elliott is successful in implementing its recommendations or not, I like Suncor's low break-even cost on oil and the flexibility this gives the company going forward amid a landscape of elevated oil prices.