Calgary – One of North America’s most aggressive activist investors has set his sights on Suncor Energy Inc. , seeking to reform the company’s board of directors and management team, along with the possible sale of Petro-Canada.
In a letter to Suncor’s board of directors on Thursday, US-based Elliott Investment Management expressed frustration with what it described as the recent downturn in performance at the energy production company.
“It is clear that Suncor’s status quo is not working,” John Pike, Elliott partner and portfolio manager Mike Tomkins wrote in their letter.
“Shareholders have seen their investments lag behind nearly all large-cap oil and gas companies in North America, with the share price of Suncor remaining virtually unchanged since early 2019, even as oil prices rose to their highest level in nearly a decade.”
Suncor, which was the most valuable Canadian energy company by market capitalization from 2000 through 2018, has been in the doldrums recently. Elliott’s letter indicates that the company’s stock price is lagging behind that of the company, Canadian Natural Resources Ltd. , by 137 percent over the past three years.
The company has also experienced a series of operational difficulties recently – the company’s production guidance has been lost due to equipment failures and cold weather – as well as significant workplace safety concerns. Since 2014, 12 workplace deaths have occurred at Suncor locations, which Elliott said is more than all of the closest similar companies combined.
In their letter, Pike and Tomkins said all of these problems have roots in what they describe as a “sluggish corporate culture and hyper-bureaucracy.”
Elliot Investment Management is a well-known activist investor with approximately $51.5 billion in assets under management. It has previously targeted large companies such as AT&T, Hyundai and Softbank.
It owns 3.4 percent of the economic interest, including equity and cash-settled derivative contracts, in a Calgary-based company.
In her letter, Elliott laid out his proposal for Suncor, which includes adding five new independent directors to the company’s board and then conducting a strategic review of Suncor’s executive management team, including CEO Mark Little.
It also wants Suncor to explore opportunities to “unlock value” outside of its core lubricants business. Possibilities could include potential sale or sub-offering of Suncor’s Petro-Canada’s 1,800 retail network.
On Thursday afternoon, Suncor released a statement saying it remained confident in the company’s strategy, but would take time to carefully evaluate Elliott’s proposals.
“The Suncor board and team look forward to engaging with Elliott in a timely manner to better understand their view,” Suncor spokeswoman Sneh Setal said in the statement.
The news of Elliott’s move Thursday came as no surprise to Eric Nuttall, senior portfolio manager for Ninepoint Energy Income Fund and a partner at Toronto-based Ninepoint Partners LP.
“There has been grumbling over the past several months at the prospect of an activist looking into the company, given how far behind it is from its peers,” Nuttall said in an interview.
However, Nuttall said the news is significant, not only because of Suncor’s history and “brand name recognition” but also because aggressive active investor activity is rare in Canadian oil and gas.
“Not to say the way Elliott does it is wrong – it’s definitely impressive,” he said. “But it’s more Canadian to do it in a style that’s more child-friendly.”
Even in the United States, activist investors have historically not had a high success rate when it comes to targeting oil and gas companies, said Josh Young, chief investment officer and founder of Bison Investments, an oil and gas-focused investment firm based in Houston, Texas.
However, Young said that some of them are likely to take a fresh look at the sector for now given higher oil prices and positive market fundamentals for the industry in the near term.
“It makes sense for activist investors to get all the clarity from the market to refocus and go after the drooping fruit,” he said. “And Suncor is very clear – you have to be a big fund to target them, but it’s a very clear target.”
Young said Elliott will conduct her research and clearly knows there are other contributors who share her belief that Suncor has lost its way.
He noted that Suncor cut its dividend by more than 50 percent in the economic downturn of 2020, while Canadian Natural Resources Ltd. To maintain its dividends despite market challenges.
“Even if Elliott didn’t own much of the stock, they would probably have correctly identified that a lot of common shareholders (in Suncor) would be interested in the change,” Young said.
Young added that it would not be surprising to see more active investment activity in the oil and gas sector, now that the ice has been broken.
“It just seems more doable, now that Elliot has done it,” Young said.
Pike and Tomkins said in their letter that they look forward to engaging with the board, along with their fellow shareholders, and hope to meet with the board as soon as possible.
Suncor’s stock closed up $5.07, or 12 percent, at $47.22 Thursday on the Toronto Stock Exchange.
Elliott said she believes her Suncor proposal could result in a share price of $60 or higher, roughly a 50 percent increase in shareholder value.
This report was first published by The Canadian Press on April 28, 2022.
Companies in this story: (TSX: SU)
Amanda Stevenson, The Canadian Press