My investment in Suncor reconsideredI’ve been a pretty consistent Suncor bull here on Stockhouse though the events of the last week has made me reconsider my investment.
My investment thesis was first when I bought at $23 - $24 back in August 2021 that simply Suncor was undervalued and there was a huge possibility they would restore their full dividend. I've bought more since then too so I've been a believer.
What has kept invested is I liked Suncor’s promise of putting 50% of excess cash towards buybacks and 50% towards debt coupled with the macro oil picture. My understanding is that “excess cash’ would be “adjusted funds from operations – the cost of the dividend”. In the last 4 quarters that amount is a very healthy ~$14.55 billion CAD. In the second quarter Suncor did put approximately 50% of that quarter’s “AFFO – Dividend” towards buybacks and in May and June 2022 Suncor was purchasing about a million shares a day. Price went from mid-$30’s to mid-$50’s. That’s what I am looking for.
However the second quarter was the only quarter where Suncor lived up to its promise of 50% buybacks. Since June daily buybacks has been around 225,000 shares a day. In fairness to Suncor obviously they switched to retiring debt over buybacks in Q3. They recently announced they bought back $3.6 billion in face value bonds at discount. This is a good move by the company so here I will cut them some slack.
At the end of Q3 Suncor’s net debt was ~$14.5 billion. The promise is 75% of “AFFO-Div would go towards stock buybacks once net debt hit $12 billion. Well $14.5 billion - $3.6 billion is actually $11 billion. So in a way Suncor should already be hammering the stock buybacks. However in October this did not happen as stock buybacks were still around 225,000 a day.
Meanwhile Suncor purchased a bigger stake of Fort Hills for $1.1 billion and it looks like they may go for 100% which may be another $1 – 1.5 billion. So I think right now Suncor must be rebuilding its cash position – so still weak on the buybacks. The current quarter will be another good one in line with 2022’s other quarters. They are generating lots of AFFO or what they vaguely call "excess funds".
As far as I can figure Suncor should be close to paying for the purchase of $3.6 billion in debt, paying for the new stake in Fort Hills and putting away cash for an additional purchase at Fort Hills. AFFO-Div should be around $15 - $16 billion on the year 2022.
The good news is if Suncor ever actually starts consistently buying back shares with 75% of “excess funds” it should light a fire under the stock and it may start to catch up to the sort of returns other O&G names are getting. The bad news is they haven’t started yet and stock buybacks seem to take a back seat to everything else.
One other good piece of information is if you take the four quarter rolling average of returns to investors over the last 2 years it’s getting higher and higher each quarter and looks like it will continue this quarter. That’s a good trend. If they go to 75% this number should increase signifigantly.
So I will hold. However I will look to Suncor starting their promised 75% of excess cash towards buybacks soon. That could be possibly over a million shares a day. They say that will happen by the end of the first quarter 2023. IMO – looking at the numbers – they should be able to start that sooner than that. That’s what to look for. I just hope they don't keep finding reasons not to do it. Its disappointing to see your investment under perform it's potential.