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Suncor’s Q2 Results: Will the Upward Momentum Continue?

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Suncor’s stock performance

Suncor Energy’s (SU) second-quarter results are scheduled to be announced on July 24. We’ll discuss the stock’s price range based on its current implied volatility. We’ll also discuss analysts’ expectation about Suncor’s dividend payment in the third quarter.

Suncor stock, oil prices, and equity markets have recovered in the past month following a slump in May. In May, Suncor stock fell 5.9% due to a fall in oil prices and equity markets. SPY fell 5.1% in May. The equity market fell due to the escalating US-China trade war and rising tension between the US and Mexico. The tension also impacted oil prices. WTI fell 11.5% in May.

Since June 3, Suncor stock has risen 1.6%. The SPDR S&P 500 ETF (SPY), a broader equity market indicator, has risen 8.5%. WTI, the benchmark oil, has risen 7.2% during the same period. Overall, Suncor stock has risen in the quarter but underperformed SPY.

ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) have risen 8.0%, 8.3%, and 4.6%, respectively, in the past month. Petrobras (PBR), YPF (YPF), and ENI (E) have risen 6.2%, 23.1%, and 9.9%, respectively, during the same period.

The expectation of interest rate cuts supported the market. The US-Mexico issue eased, which boosted the market. At the end of June, the tension between the US and Iran rose, which lifted oil prices. OPEC’s decision to continue its production cuts also supported oil prices.

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Suncor’s stock price forecast

Suncor is expected to post its second-quarter earnings on July 24. The price range forecast will be based on Suncor’s current implied volatility.

The implied volatility in Suncor has fallen by 6.1 percentage points since June 3 to the current level of 21.3%. During the same period, Suncor stock has risen 1.6%.

Considering Suncor’s implied volatility of 21.3% and assuming a normal distribution of prices and standard deviation of one with a probability of 68.2%, Suncor’s stock price could close between $32.9 per share and $29.7 per share in the 21 days ending July 24.

Like Suncor, the implied volatility in Petrobras (PBR) and PetroChina (PTR) has fallen by 3.5 percentage points and 4.6 percentage points, respectively, since June 3. Currently, the implied volatility in Petrobras and PetroChina is 34.4% and 21.6%, respectively. The implied volatility in Chevron (CVX) has fallen by 3.8 percentage points since June 3 to the current level of 17.4%. If we review the stock prices, then Petrobras and Chevron stock has risen by 6.2% and 8.3%, respectively, since June 3. PetroChina has fallen 0.9% during the same period.

The implied volatility in the SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA), which closely resemble the S&P 500 Index and the Dow Jones Industrial Average, have fallen, respectively.

In the past month, the implied volatility has fallen by 7.3 percentage points in SPY and by 7.1 percentage points in DIA. Currently, the implied volatility in SPY and DIA is 10.2% and 10.8%, respectively. SPY and DIA’s values have risen 8.5% and 8.6%, respectively, during the same period.

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Will Suncor pay a higher dividend in the third quarter?

Suncor Energy’s dividend payments have been increasing steadily over the past few years. In the second quarter, Suncor paid a dividend of 0.42 Canadian dollars per share on June 25. Suncor’s second-quarter dividend payment represents 31% growth over the second quarter of 2017.

Analysts expect Suncor’s dividend payment per share to be stable at 0.42 Canadian dollars per share in the third quarter. In 2017 and 2018, Suncor raised its dividend payment in the first quarter followed by steady dividends in the rest of the quarters. Analysts expect Suncor to follow the trend and maintain its dividend payment.

Going forward, the company expects its shareholder returns to continue to grow. Suncor’s second-quarter dividend payment represents 17% YoY growth.

Suncor’s current dividend yield is 4.0%. BP (BP) has the highest dividend yield of 5.9%. Royal Dutch Shell (RDS.A) has a dividend yield of 5.8%. Total (TOT) and ExxonMobil’s (XOM) dividend yields are 5.2% and 4.6%, respectively. Chevron (CVX) and Equinor (EQNR) have lower dividend yields at 3.9% and 4.8%, respectively.

Suncor has consistently returned wealth to shareholders in the form of dividends and share buybacks. In the first quarter, Suncor’s cash outflows due to dividends stood at 662 million Canadian dollars. The company’s share repurchases stood at 514 million Canadian dollars.

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Suncor’s total cash outflows towards shareholders’ returns rose ~20% YoY to 1.1 billion Canadian dollars in the first quarter. The company is in a position to pay growing dividends and incur capex at a low oil price level of ~$45 per barrel. Suncor has a lower dependence on high oil prices for shareholder returns, which is a favorable scenario.

Suncor’s aim to strike an optimal balance between the capex and returns was also reflected in its first-quarter earnings conference call. Mark Little, Suncor’s president and CEO, said, “So we’ve created and shifted the company over the last many years, as everybody realizes, to a company of much more modest growth and higher returns to the shareholders. And so we’re now into our 17th year of consecutive dividend increases. We’ve repositioned the company that way. And our focus is ensuring that we’re very diligent on the projects that we’re taking on and how we spend the capital for the organization.”

Has the short interest fallen?

The short interest in Suncor has fallen from 0.64% on June 13 to the current level of 0.53%. Usually, a drop in the short interest means a decrease in the bearish sentiments in a stock. During the same period, Suncor stock has risen 1.0%.

The lower negative sentiments for Suncor stock could be due to an expected rise in its earnings in the second quarter. Analysts expect the company’s earnings to rise 21% YoY to 0.88 Canadian dollars in the second quarter. ExxonMobil (XOM) and Total’s (TOT) EPS is expected to fall 4% and 2% YoY, respectively.

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The rise in Suncor’s earnings could be due to its higher volumes. Suncor’s upstream production rose 11% YoY to 0.76 million barrels of oil equivalent per day in the first quarter due to rising volumes at Fort Hills and Hebron. Syncrude’s better asset usage boosted production. Suncor’s cash operating cost at Fort Hills and Syncrude fell 45% YoY and 27% YoY to $30 per barrel and $37 per barrel, respectively, in the first quarter.

The fact that oil prices have risen in the past month could have boosted the positive sentiment in Suncor stock. In the past month, WTI prices increased 7.2%. Oil prices are relevant for integrated energy companies. Oil prices are one of the main determinants of the company’s upstream earnings.

The short interest in Total (TOT) and Equinor (EQNR) has fallen by 0.02 and 0.07 percentage points since June 13 to 0.05% and 0.13%, respectively. The short interest in YPF (YPF) has fallen by 0.75 percentage points to 2.45%. Since June 13, Total, Equinor, and YPF’s stock prices have risen 5.1%, 2.2%, and 6.5%, respectively.

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