Suncor Energy Inc. won back a bull in the analyst community Monday, as Greg Pardy at RBC Capital Markets upgraded the stock to the equivalent of a buy as the oil sands giant is seen regaining its "best-in-class" status.
 
Pardy changed his recommendation on Suncor to outperform from sector perform (the equivalent of a hold). He also upgraded his 12-month price target to $53.00 per share from $47.00. He previously had an outperform recommendation on the stock up until mid-February of this year.
 
"We believe that Suncor has reached a favourable inflection point as it relates to improving its operating reliability and safety," he wrote in his report to clients. "This will take time and there are bound to be bumps in the road along the way, but the direction of travel is clearer to us now."
 
Suncor, long the Goliath of Canada's oil sands, was mired in a stretch of underperformance prior to this year amid a series of operational setbacks and concerns about worker safety. In the five-year period from 2017 to the end of 2021, Suncor shares tumbled 28.3 per cent, compared to a 24.9 per cent gain for Canadian Natural Resources Ltd., and a 19.5 per cent swoon for the S&P/TSX Composite Index's energy subgroup.
 
However, Suncor has recently regained confidence in the investment community; indeed, its shares surged 41.3 per cent year-to-date through the close of trading Friday. By comparison, Canadian Natural has rallied 27.9 per cent, and the energy subgroup has gained 23.3 per cent.
 
No doubt the surge in commodity prices has worked in Suncor's favour, as West Texas Intermediate (WTI) crude soared as high as US$130.50 per barrel in early March amid persistent supply concerns. That helped push Suncor's adjusted funds from operations to a record $3.4 billion in the most recent quarter. Pardy estimated Monday that Suncor could end up with $14.7 billion in free cash flow this year under his baseline commodity-price expectations, which includes WTI at US$100 per barrel.
 
Flush with cash, the company has also been boosting returns to shareholders — notably when it declared a record dividend last month after having slashed payouts shortly after the onset of the COVID-19 pandemic.
 
In his report to clients, Pardy said he walked away from recent meetings with Suncor feeling "encouraged that the company has a tighter grip on the steps required to regain its status as a best-in-class oil sands operator." That includes a view that management "understands both the causality of its operating and safety woes in recent years, as well as the remedies."
 
Suncor's reputation was damaged in recent years by a number of operational missteps and safety infractions. Most recently, the company announced a fatality at its Base plant in early January. 
 
Pardy highlighted management changes, including the appointment of Peter Zebedee as executive vice-president of mining and upgrading this year, as indicative that "standardized and intensified safety procedures is mission critical" for the company.
 
He also acknowledged the pressure that's been foisted on Suncor by Elliott Investment Management, the U.S. activist investor that went public in April with its call for a board-level overhaul of the oil producer.
 
Elliott has gone quiet, at least publicly, since initially announcing its 3.4 per cent stake in Suncor and its call for a strategic pivot, including possibly selling the company's Petro-Canada gas station business.
 
While Suncor Chief Executive Mark Little later dismissed the idea of divesting that unit, he took Elliott's sabre-rattling in stride, calling it a "normal part of the journey."
 
For his part, Pardy said he's "agnostic" about Suncor's ultimate decision for the retail business, with the caveat that he expects there to be "clear logic to its decision." 
 
Of the 19 analysts tracked by Bloomberg who cover Suncor, 13 have buy recommendations. The other six have hold recommendations. The consensus 12-month price target is $58.09 per share, implying 29.9 per cent potential upside from Friday's close on the Toronto Stock Exchange.