Buffett sell-off of Suncor stock signals shift amid climate of uncertainty
Billionaire Warren Buffett sold off the remaining 22.3 million shares he held in Suncor Energy during the most recent quarter, according to a new filing from his investment conglomerate, Berkshire Hathaway Inc.
His sale of those shares raises a number of questions. Has he soured on energy stocks? Is it a statement on the relative competitiveness of Canada’s energy sector? Or is it simply an astute investor rotating out of a position he’s held since 2013 in favour of more attractive opportunities?
It’s likely a combination of all three, which are worth unpacking individually.
When Buffett sold down his holdings in ExxonMobil during the fourth quarter of 2014, the reasons he gave included the fact he had other uses for the money — reinforcing the investment principle that money goes to where it can get the best return — and that the oil giant’s earnings power had diminished in the current price environment.
That was long before prices hit rock bottom, as they did early this year.
The same reasoning can be applied to his decision to sell the Suncor position.
There is a perception Suncor’s valuation is ahead of itself; that it needs a ‘fancy’ oil price to justify where it’s trading. If you are a value investor, why not sell into the market if the stock is perceived as full valued, if not overvalued?
Buffett did not sell his position in downstream player Phillips 66, which suggests he sees more upside from the refining side of the business.
The move to sell Suncor at current valuations and hold onto Phillips 66 while putting his money to work in four U.S. airlines suggests Buffett has bought into the ‘lower for longer’ oil price scenario that benefits the downstream and users of refined products, such as the airlines, and puts higher-cost producers at a disadvantage.
That’s especially true for oilsands players whose cost structure is generally higher and are at the end of a pipe, far from markets.
In light of the recent U.S. election results, the issue of competitiveness has come under greater scrutiny.
The ability of Canada’s oilpatch to compete with American oil and gas producers has been further compromised, and even with a weaker Canadian dollar, there is much to fret about. Topping the list is the simple fact that within six weeks, a carbon tax will go into effect in Alberta, which will boost the costs for Canadian players. Yet the cost structure of the barrels coming out of Texas isn’t changing, arguably putting Canadian production at a competitive disadvantage. One concern voiced following the U.S. vote is that the coming provincial carbon tax and anticipated tax reforms south of the border under Donald Trump will put Canada and Alberta further behind when it comes to competing for investment capital.
Added to this scenario — in Alberta, anyway — is the profound investment uncertainty being propagated by the NDP government and exemplified by the $2-billion lawsuit it launched earlier this year against those companies that exercised a clause to terminate their power purchase arrangements when the contracts became “more unprofitable.”
And now, it appears, the government seems to be pursuing a divide-and-conquer approach among companies listed in the lawsuit, treating each of them differently. All this adds up to uncertainty — and is inextricably pushing companies to allocate investment dollars elsewhere.
Mayor Naheed Nenshi summed it up best Tuesday while speaking to reporters at City Hall.
“When people make investments, they certainly take into account political risk,” he said. “To think you have to take into account that kind of political risk as though you were investing in a place without the rule of law. In Alberta? In Canada? That is nuts. It’s absolutely nuts.
“Who would ever invest in this province if they thought the government would just invalidate their contract decades later?”
The Notley government seems unable to recognize that the uncertainty created by its actions regarding the PPAs infects the entire investment climate in the province, not only the electricity sector. It would be foolish to think any of this is lost on the astute investment types at Berkshire Hathaway, especially when one of Buffett’s potential successors, Greg Abel, the chairman, president and CEO of Berkshire Hathaway Energy, hails from Alberta and is a graduate of the University of Alberta. Berkshire Hathaway Energy bought Calgary-based AltaLink in 2014 for $3.2 billion, and it’s worth noting the company has avoided the spotlight since the issues of the PPAs and the government lawsuit surfaced.
The Alberta government should interpret Buffett’s decision on Suncor as a reflection of a value investor’s negative interpretation of the long-term outlook for oil prices and that other sectors with stronger economic prospects and investment certainty offer better rates of return.
Alberta can’t do anything to change the trajectory of oil prices, but it can control other variables, such as fostering a positive investment climate.
That means not introducing measures that disadvantage a sector’s cost structure at a time when its competitors are not exposed to similar costs, and providing certainty for long-term investments. Whether it’s oilsands or electricity, investment decisions are made for decades, not years. Those risking the capital need to be sure contracts will be honoured, even as governments change.
Nenshi warned Tuesday that the prospect of the Alberta government contemplating legislation to invalidate contracts signed in good faith 16 years ago would chill Alberta’s investment climate.
“In so doing they would be sending a very strong signal that they’re not interested in private investment and that this government, this province, is in fact closed for business,” the mayor said.
Given all the economic challenges in Alberta today, that’s the last thing we need. The door needs to be wide open for business.