Goldman Sachs (
GS, Financial) recently dropped Suncor Energy Inc. (SU, Financial) from its conviction buy list to its regular buy list, citing a lack of catalysts as their reason for the downgrade. However, this is shortsighted, in my opinion. I believe there are many reasons why investors should be getting more bullish on the stock at this time rather than more bearish.
A powder keg needs a spark, but a quality stock only needs consistency
Goldman’s reason for becoming less bullish on Suncor is old news. A company that is just getting started may need a lot of obvious catalysts in order to grow, but once a company is more well-established, it becomes easier to continue growing even with fewer new catalysts. Suncor only needs to sustain its impressive operational structure to outperform the industry.
The company owns its entire value chain with ownership of significant oil sands and conventional production platforms. From a downstream vantage point, its portfolio includes more than 1,500 Petro-Canada retail and wholesale outlets. This vertically integrated business model allows the company to outperform most stocks during inflationary periods, causing Suncor to be an attractive asset for a conviction play.
Suncor’s major project in Fort Hills has been seen as a catalyst for slowing growth. Temporary maintenance is taking place as a slope is being leveled out, and this will add to operating cost. Production is estimated to be lowered by 30,000 barrels per day for the year. I think this is just a temporary friction, which can safely be disregarded. Fort Hills produced more than 58,000 barrels per day day last year, and Syncrude (Suncor’s other major project) produced 163,000 barrels per day. Investors should look at what’s to come instead of magnifying temporary issues.
From a relative perspective, Suncor’s forward price-earnings ratio is estimated to beat the sector median by 19.17%, and its current enterprise-value-to-Ebitda ratio is better than the sector median by 32.15%. Suncor’s price-book ratio also represents a better value compared to its five-year average and is cheaper than the current sector median by 37.41%. Its solid price-book numbers can largely be attributed to deleveraging its balance sheet from 75% to 40%. A cash increase of $500 million since August 2020 has played its part as well.
I think Goldman and other analysts who are downgrading Suncor are not properly taking the company’s future into account. The investment bank expects only 35% upside over the next 12 months, while the rest of Wall Street expects an upside of over 50%. In my book, Suncor is still a conviction play!