Credit Suisse says that Suncor Energy Inc. (NYSE:SU) may soon sell its gas stations for a pre-tax profit in the range of 9.6 billion Canadian dollars ($7.39 billion) to CA$11.2 billion by selling its retail business.
Manav Gupta, one of Credit Suisse’s analysts, believes that there is a possibility that Suncor Energy Inc. (NYSE:SU) may end up selling its retail business at some point in the future, just as Marathon Petroleum did. As with Marathon’s Speedway sale proceeds, Credit Suisse believes proceeds could be used to support and bolster higher shareholder returns.
Why Suncor’s Retail Business Holds Great Value
Suncor Energy Inc.’s (NYSE:SU) retail business offers complete vertical integration, which allows the company to control the whole value chain. Consequently, it does not need to negotiate with the suppliers, which means it has a higher degree of power when it comes to pricing. As a result of its existing business model, the company is able to not only maintain pricing power but also achieve economies of scale. For example, Suncor Energy Inc. (NYSE:SU) has a gross profit margin of 48.76%.
Potential Valuation Concerns
There are several valuation concerns with Suncor’s stock that are multifaceted in nature. First of all, the stock trades at 1.52 times its book value, which suggests that the asset has been overhyped by the market. In addition, it is unclear whether inflation has reached its peak; however, if inflation tapers off, much of the company’s book value could decline abruptly as oil and gas prices are very elastic.
Another potential concern is the company’s dividend payout to residual trade-off. If you are interested in total returns, Suncor Energy Inc.’s (NYSE:SU) 38% dividend payout ratio and 3.88% dividend yield are undoubtedly attractive. When dividend payouts drift too high, however, they tend to slow down the growth of the underlying companies, which in turn slows down the trajectory of the stock price.
Last but not least is the fact that Suncor Energy Inc.’s (NYSE:SU) price-earnings ratio is not at all low. In fact, the company’s PEG ratios and price earnings indicate its previous four quarters’ earnings per share growth does not support its current stock price. As a result, Suncor Energy Inc. (NYSE:SU) could possibly be very overpriced at the moment.
Conclusive Thoughts:
It is evident that oil and gas stocks are attractive investments during this time of inflation that we are experiencing. In addition, many analysts believe oil and gas could potentially experience a long-term growth trend as supply concerns persist. However, Suncor’s relative valuation metrics suggest that it is significantly overvalued, which makes it a risky bet. Additionally, Suncor’s sale of its retail business could potentially impede its long-term progress as the abandonment of its vertically integrated company would likely reduce Suncor’s power to control prices in the future.
About Suncor
Suncor Energy is one of Canada’s leading integrated energy companies. The company’s operations include oil sands development, offshore oil and gas production, production and upgrading, petroleum refining in Canada and the U.S. and the company’s Petro-Canada retail and wholesale distribution networks, including Canada’s Electric Highway, a coast-to-coast network of fast-charging EV stations. While developing petroleum resources, the company is advancing the transition to a low-emissions future through investment in renewable fuels, power and hydrogen. Also, Suncor conducts energy trading activities, primarily focused on crude oil, natural gas, byproducts, refined products, and power. The company has been strongly recognized for its performance and transparent reporting on the Dow Jones Sustainability Index, FTSE4Good and CDP. Suncor’s common shares are listed on both the New York and Toronto stock exchanges.
Featured Image: Megapixl @Shariffc
