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The problem with being the big dog on the block is that when you lose that top spot, everyone notices.
Suncor Energy finds itself in that uncomfortable position today, as recent setbacks by the oilsands giant are now under an intense spotlight.
The glare became brighter Thursday with the arrival of high-profile U.S. activist investor Elliott Investment Management calling for a seismic shift at the Calgary-based company.
The U.S.-based private investment firm, which manages funds that have a 3.4 per cent economic stake (including shares) in Suncor, issued a letter Thursday to the company’s board of directors, backed up by a 45-page presentation and a snazzy new website.
“In recent years, the company has seen a decline in the exceptional performance that was formerly its hallmark,” states a letter to Suncor chair Michael Wilson from Elliott partner John Pike and portfolio manager Mike Tompkins.
“It is evident that Suncor’s status quo is not working.”
The letter cited missed production goals, higher costs and several safety incidents, saying these issues “find their roots in a slow-moving, overly bureaucratic corporate culture . . . with the right leadership, the company can restore its prior success.”
The investment firm is calling for the appointment of five new independent board members; Elliott has identified experienced executives for the role, including four from Canada, although it didn’t name them.
It wants a review of Suncor’s executive leadership by the refreshed board, an increase of capital returned to investors and an overhaul of the operational and safety culture, citing a number of fatal accidents involving employees and contractors since 2014.
Finally, it’s touting a strategic review of Suncor’s non-core assets outside of the oilsands, including Suncor’s chain of almost 1,600 Petro-Canada retail sites. Such a move could mirror Imperial Oil’s decision to sell almost 500 retail stations for $2.8 billion in 2016.
With US$52 billion of assets under management, Elliott has a track record of investor activism involving companies such as Twitter, and has made oilpatch investments in Hess Corp. and Marathon Petroleum, which eventually saw a new CEO installed and the sale of its Speedway retail chain.
“They are the real deal, deep pockets, good track record,” said Eric Nuttall, a senior portfolio manager with Ninepoint Partners, which has a small stake in Suncor.
“I think (Suncor CEO) Mark Little has a challenge ahead of him.”
Suncor’s shares jumped 12 per cent to close at $47.22 on the Toronto Stock Exchange, its highest point since 2018.
“The thing that makes Elliott formidable is they have a pretty high batting average,” added Michael Tims, vice-chair of Calgary-based Matco Investment.
“Most of the time, it starts off that they negotiate a compromise with the existing board and it gets figured out that way, rather than having to go to a full proxy fight.”
Suncor, which had almost 17,000 employees at the end of last year, has been a pacesetter in the Canadian oilpatch for decades.
Under the leadership of Rick George, Suncor grew rapidly in the 1990s and early 2000s, punctuated by its $18.4-billion merger with Petro-Canada in 2009. Steve Williams took over in 2012 and continued to expand, buying Canadian Oil Sands and completing the $17-billion Fort Hills oilsands mine in 2018.
Williams retired the following year and Little has been at the helm ever since, navigating through the whipsaw of oil prices over the past 24 months.
The Elliott letter notes that from 2000 until the fall of 2018, Suncor had the highest market capitalization of Canadian energy companies and was “broadly viewed as the industry bellwether,” but has lost that top spot.
It believes the proposed strategy could unlock more than $30 billion in value for investors, an ambitious target for a company with a $60.5-billion market valuation.
Suncor officials issued a brief, diplomatic statement Thursday afternoon, saying the board and management team “appreciates the views of its shareholders” and will take time to carefully assess recommendations from the U.S. investor.
With its first-quarter earnings call and annual meeting planned for May 10, it won’t take long to see how the board reacts to Elliott’s call for action.
“We don’t see a lot of activism in Canada,” said Randy Ollenberger, an analyst with BMO Capital Markets.
“Their plan is basically to bring in a fresh set of eyes.”
As oil prices have surged in the past 12 months, Suncor stock has risen 77 per cent, including Thursday’s jump, while the S&P/TSX Capped Energy Index has rallied by 106 per cent.
During the same period, shares in Canada Natural Resources are up 112 per cent.
“Their stock has been underperforming,” said Laura Lau, the chief investment officer with Brompton Group. “It makes sense for somebody to try to shake things up.”
Like many other companies in the industry, Suncor was pummelled during the early part of the pandemic as oil prices collapsed in 2020. It decided to reduce its long-standing dividend by 55 per cent that May — something Canadian Natural Resources didn’t do — although Suncor later increased it in the fourth quarter of 2021.
Rafi Tahmazian, a senior portfolio manager at Canoe Financial, which owns shares in Suncor, said Elliott’s strategy is designed to “unleash the cash” within the company during a period of higher commodity prices.
“On the surface, we are intrigued by it,” he said of the Elliott proposal. “This is not a group, an activist, that is trying to put a bullet in it — it’s trying to stimulate it, and I’m all for that.”
Just 12 days before Suncor’s annual meeting, the spotlight has increased on one of Canada’s marquee integrated oil producers.
Future moves — including the board’s response to the presence of a prominent activist investor — are about to fall under even greater scrutiny.
Chris Varcoe is a Calgary Herald columnist.
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