Analyst Note| Joe Gemino, CPA |
We are increasing our fair value estimate for no-moat Suncor Energy to $22 (CAD 28) from $21 (CAD 27). Our higher fair value estimate is driven by increased near-term commodity price forecasts along with an increase in our long-term U.S. Gulf Coast pricing for heavy oil. The stock is trading near $18 (CAD 23), and we see over 20% upside at those levels. In our view, the market is too narrowly focused on the temporary decline in demand for refined products along with the issues plaguing the other upstream companies. We expect refinery demand to pick up when crude oil demand increases, and Suncor's integrated operations will help generate positive cash flow. Suncor’s downstream business provides stable cash flows when oil prices are low or differentials widen and hedges against the company’s upstream production. The stock still offers investors a 3.5% dividend yield in addition to the upside.