Suncor looks to turn the corner amid American investor pressure

Amid investor discontent, Suncor Energy announced its latest financial results and the numbers were a blockbuster as profits tripled to nearly $3-billion for the first quarter of this year. 

Still, investor response was lukewarm as the company’s stock lost value on Tuesday.

Rosy financial results for the first quarter of the year just aren’t enough to turn the murky sentiment around the oilsands giant and Petro-Canada gas station owner, following poor operational performance, a series of workplace fatalities and a stock price that has under-performed some other Calgary-based oil majors. 

The sharp rise in profits could show that Suncor is beginning to turn the corner or it could represent a brief moment of relief from some investor calls for a major shake-up of the company.

Last month, U.S.-based Elliott Investment Management expressed frustration in Suncor for what it called a recent decline in performance including a recent string of operational difficulties — due to equipment failure and cold weather — as well as worker fatalities.

Elliott’s letter also pointed out the company’s share price has lagged that of its closest oilsands peer, Canadian Natural Resources Ltd., by 137 per cent over the last three years.

The firm pointed to these factors as it made a case to Suncor to consider an overhaul of the company’s board and management.

Improvements underway, CEO says

On Tuesday, Suncor chief executive Mark Little repeatedly defended his company and listed a series of changes at the company to improve safety and operations, such as new additions to the executive team and the hiring of outside consultants to provide guidance on best practices.

After four fatalities in the last 18 months, the chief executive acknowledged during the company’s annual general meeting that “clearly more needs to be done.”

Petro-Canada is not up for sale, says Suncor chief executive Mark Little. (Kyle Bakx/CBC)

The company’s financial performance over the last three months “pretty handily beat our expectations,” said Matt Murphy, an analyst with from Tudor, Pickering, Holt and Co.

“The underlying results of the business [are] certainly running quite well,” he said, in an interview.

Suncor’s stock likely fell, Murphy said, because some investors, including Elliott, may be interested in Suncor selling the Petro-Canada chain of gas stations.

At this point, that’s not a consideration for Suncor.

“It’s intertwined with our wholesale and industrial business as well,” Little said during a conference call to discuss the company’s first quarter financial results.

“(Petro-Canada) is a very strong performer and can go head-to-head with other retail businesses … We think we have the best downstream business in North America, and we think it’s important that it stays together,” he said.

Soaring profits

In fending off criticism, Little pointed to the company’s financial results to show how Suncor is on track for improvement.

The first-quarter profits of $2.95 billion were up from $821 million in the same period of 2021, while cash flow was the highest in the company’s history.

At the same time, the dividend to shareholders is also increasing to what the company called the highest in its history.

“All parts of Suncor are shifting into high gear,” Little said.

The level of pressure against Suncor is difficult to gauge, at this point. During the company’s annual general meeting on Tuesday, there was only one shareholder question (about a possible hydrogen facility) and all of the votes passed, including for the board of directors and executive compensation.

Little received support from more than 93 per cent of shareholder votes.

Eliott did not nominate any directors at the meeting.

Suncor has run into issues at the Fort Hills oilsands facility after a slope stability issue was discovered at the mine last year. Production is ramping up at the facility so far in 2022. (Kyle Bakx/CBC)

To convince any disgruntled investors, Suncor will likely have to show that the recent financial performance wasn’t an anomaly, but the start of consistently strong results.

However, the months ahead may not be straightforward as the company is about to power-down several of its facilities.

“The challenge that they’re facing right now is there’s a lot of maintenance going on across the portfolio,” said Murphy.

The shutdowns are pre-planned, but will still impact some of Suncor’s refining business and several oilsands projects including the largest maintenance work at the Firebag facility.

This is usually routine work, but considering the company’s recent issues this is an area that investors will be watching for any further signs of operational issues.

With all the recent turbulence around the company, investors don’t want to see any more problems at the oilsands giant.

As for Elliott, its next move isn’t clear. In the past, Elliott has targeted other large under-performing oilpatch companies, including the ousting of Marathon Petroleum’s CEO in 2019.

The investment firm will meet with Suncor’s brass this week, according to news reports, which could impact how much patience Elliott will have with the current board and management at the company.

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