Suncor’s strong earnings may not be enough to fend off shareholder pressure: experts

The Suncor Energy Centre in downtown Calgary, Alta., Wednesday, Dec. 9, 2020. THE CANADIAN PRESS IMAGES/Jeff McIntosh

Suncor Energy Inc. now has strong first-quarter earnings in its arsenal and a publicized plan to improve worker safety, but some observers say that won’t be enough for the Calgary-based oil giant to fend off an aggressive activist investor.

Speaking publicly Tuesday for the first time since U.S.-based Elliott Investment Management called for changes to the company’s leadership as well as the possible sale of the Petro-Canada retail chain, CEO Mark Little said Suncor is on the right track.

“While we still have work to do, I’m pleased to report that we’re making progress and that all parts of Suncor are shifting into high gear,” Little said on a conference call to discuss the company’s first-quarter financial results.

“Our board and management have great confidence in our plan and the progress we’re making.”

Little touted Suncor’s profits of $2.95 billion in the first quarter — up from $821 million in the same period of 2021 — as well as the highest quarterly cash flow in the company’s history as proof.

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READ MORE: Suncor reports earnings of $2.95B as oil prices surge

He also rejected Elliott’s premise that Suncor should spin off or sell its 1,800-location retail chain of gas stations.

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

Elliott — which has a 3.4 per cent economic interest in Suncor and a track record of targeting large corporations it views as underperformers — has been critical of Suncor’s lagging share price as well as a recent spate of operational difficulties and workplace safety incidents.

The company has reported 12 workplace deaths since 2014, and struggled with production issues related to equipment failure and weather.

READ MORE: Suncor’s safety record in spotlight as activist investor calls for change

But Little said Tuesday Suncor is already making changes, including a third-party safety review, bringing on new management including former LNG Canada CEO Peter Zebedee (now Suncor’s executive vice-president of mining and upgrading), and incorporating new fatigue management and collision avoidance technology at its oilsands sites to reduce risk to workers and contractors.

“We know we’ve had challenges in our mines, and we’ve taken concrete actions since the fall of last year to strengthen our mining capability,” Little said, adding Suncor will host an “oilsands operational presentation” on July 13 to update investors on the changes it is making in support of safe and reliable operations.

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A spokesperson for Elliott Investment Management could not be reached for comment Tuesday. The firm did not nominate its own slate of candidates for Suncor’s board in advance of the company’s annual general meeting Tuesday, and more than 90 per cent of shareholders approved the election of the 11 Suncor-nominated directors.

But Eight Capital analyst Phil Skolnick said investors want to see more than just words. He pointed out that Suncor’s first-quarter report came out the same day the company experienced a minor fire at its Colorado refinery. (The fire was extinguished and there were no injuries, according to news reports.)

“At this point it (Suncor’s safety plan) is just more promises,” Skolnick said. “Investors in the market want to see proof that changes have been made.”

Skolnick added he doesn’t expect Suncor’s latest earnings to be enough to stave off Elliott’s dissatisfaction.

“It was a good quarter (for Suncor) for sure… but I don’t think this satisfies Elliott Investment Management,” Skolnick said. “One of the key items they’ve been pushing for is for Suncor to sell off their retail assets, and again management defended why they should keep it.”

On Tuesday, shareholders at the Suncor annual general meeting voted nearly 92 per cent in favour of the company’s approach to CEO pay.

Arden Dalik, executive director with Calgary-based Global Governance Advisors, said investors sometimes register their displeasure with a management team by voting against executive pay packages — and while a 92 per cent majority falls within the realm of “reasonable,” it’s not an overwhelming endorsement either.

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“They’re not really in a trouble zone, but they also came out with a record dividend Monday, so you would expect it to be a little higher,” she said. “For them, I definitely wouldn’t relax, but I think the plan they’ve announced may have bought themselves some patience from the Street.”

Suncor is streamlining its business, including with last month’s announcement that it would divest its wind and solar assets. On Tuesday, Little said the company has had a “massive response” from prospective buyers.

“So much so that it’s slowing down the process because we’ve had to process so many different inquiries associated with it,” he said.

The company also plans to divest its exploration and production assets in Norway and is exploring the sale of its entire U.K. portfolio.

On Monday, Suncor declared a quarterly dividend of 47 cents per common share payable June 24 to shareholders of record as of June 3. The company says the dividend is the highest in the company’s history and 12 per cent higher than the previous quarter’s dividend.

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The company’s net earnings amounted to $2.06 per common share, compared to 54 cents per common share in the first quarter of last year.

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Revenues were $13.5 billion, up from $8.6 billion in the prior quarter.

Suncor reported total upstream production of 766,100 barrels of oil equivalent per day (boe/d) in the first quarter of 2022, compared to 785,900 boe/d in the same quarter last year.

Refinery crude throughput increased to 436,500 barrels per day and refinery utilization was 94 per cent in the first quarter of 2022, compared to 428,400 barrels per day and 92 per cent in the prior-year quarter.

Suncor shares closed at $44.73 on the Toronto Stock Exchange Tuesday, down 1.21 per cent.

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