Oil costs have rebounded as main oil producers the world over introduced a minimize in manufacturing. Might this be the beginning of a brand new bull rally for oil shares? Is now the correct time to purchase main Canadian producers similar to Suncor (TSX:SU)? Right here’s a more in-depth look. 

Oil rebound

Oil costs have been falling for greater than half a yr. After hitting a peak in June, the worth of crude has plunged considerably. That’s as a result of power demand was decrease than anticipated as the worldwide financial system slowed down. Nevertheless, members of the Group of the Petroleum Exporting Nations (OPEC) introduced shock cuts to manufacturing over the weekend. 

Each main oil producer, from Saudi Arabia to Russia, introduced a pullback within the variety of barrels they count on to supply every day. That transfer despatched the worth of oil sharply larger. As of Monday, Brent Crude and West Texas Intermediate (WTI) are each buying and selling larger than U.S.$80 per barrel. 

Buyers should now take into account if this rally could be sustained. 

Lengthy-term outlook

Regardless of the manufacturing minimize, the outlook for oil stays combined. Economists nonetheless count on a extreme world recession this yr, which suggests power demand could possibly be decrease. It’s value noting that oil manufacturing cuts have typically preceded financial downturns. OPEC reduce manufacturing shortly earlier than the 2008 crash as nicely. 

Put merely, nobody can predict the worth of oil. However buyers can estimate the worth of power shares like Suncor assuming a broad vary of costs. 

Suncor’s valuation

Suncor inventory at the moment trades at 6.8 occasions earnings per share. It was up 5.6% on Monday after the OPEC+ manufacturing cuts have been introduced, indicating that buyers imagine this transfer is a tailwind for the corporate. 

Investor Eric Nuttall, an power skilled, believes the oil business in Canada might ship money return yields (dividends + buybacks) of 11.1% on common. He believes that Suncor’s returns could possibly be larger than most of its friends at 17% even when the worth of WTI is simply U.S.$70 per barrel. 

Put merely, buyers can count on Suncor to ship large returns even when the worth of crude stays vary certain for the foreseeable future. In the mean time, the inventory gives a large 4.7% dividend yield. 

In the meantime, Suncor’s new chief government officer Richard Kruger is making strategic strikes to reinforce the corporate’s worth. He has already applied new insurance policies to make the corporate’s drilling websites safer – a serious concern for buyers. He has additionally offloaded some non-core renewable belongings to streamline the enterprise and doubtlessly make it extra worthwhile. 

These new initiatives might take a while to be absolutely mirrored on Suncor’s backside line and inventory value. For now, the inventory stays undervalued. Buyers in search of a sturdy supply of passive revenue ought to add Suncor to their watch checklist.