SUNCOR FOCUSED ON POSITIVE OUTCOMES OF CHALLENGING YEAR
The exodus of foreign firms from Alberta is a ‘good thing,’ explains Claudia Cattaneo.
For the first time in years, the “off-oilsands” sentiment did not suck the oxygen from the room at the annual meetings of either Cenovus or Suncor.
Instead, the CEOs of both companies this week focused on the potential of the resource, the importance of scale, the value of First Nations’ partnerships and advancements made in the development and application of new technologies to reduce the environmental footprint and enhance productivity.
If anything, their messages were about resiliency and competitiveness in a world where oil prices remain under pressure.
And, if there was any doubt, Suncor’s commitment to the environment was in full view Thursday.
Its recent climate report, which details the company’s efforts to mitigate emissions, supports Alberta’s Climate Leadership Plan and details the impacts of carbon policy on Suncor’s operations was placed alongside copies of its proxy circular and annual report.
While Cenovus CEO Brian Ferguson on Wednesday needed to address investor concerns and the company’s falling share price that have followed its $17.7-billion acquisition of assets from ConocoPhillips, Suncor’s Steve Williams was able to set his own agenda a day later.
Any questions about mergers and acquisitions on Suncor’s first-quarter call — it reported net earnings of $1.4 billion compared with $257 million a year earlier — or later at the annual meeting followed Williams’ comments that the company was able to take a counter-cyclical approach on acquisitions made in 2016.
Suncor bulked up in a big way last year, flexing its balance sheet and gaining control of Syncrude Canada through its $6.6-billion purchase of Canadian Oil Sands and Murphy Oil’s Syncrude stake, a $973-million ticket.
Listening to Williams, it was fairly clear Suncor isn’t finished looking at other acquisition opportunities as they arise.
While Williams told reporters he was pleased with the company’s ownership at the Fort Hills project, the fact France’s Total SA still holds a 29.2 per cent interest and is widely rumoured to be looking at selling out of Canada and the oilsands, ownership there might be the first place to watch for further deals by Suncor this year.
The earnings call suggested a move to take advantage of acquisition opportunities — either with Total or another foreign player that could leave the basin, such as BP or Chevron — is preferred over organic investment opportunities.
“I don’t see those (organic investment opportunities) being triggered in the next year or two. I think we’re further back in terms of triggering the next generation of in situ replication,” Williams told analysts.
Being resilient in a low-price environment — with success in reducing costs, which both Ferguson and Williams said were at sustainable levels — the other area of focus at Suncor’s AGM was the importance of partnerships with First Nations.
The tone was set with the invitation of Casey Eagle Speaker, an adviser to Suncor, to open the meeting.
Eagle Speaker is a member of the Kainai Nation, which part of the Blackfoot Confederacy. His spiritual, non-partisan blessing included comments meant to recognize the common connection to the environment and the role everyone has as stewards for future generations.
Suncor remains the only major oilsands player with a First Nations member on its board. Mel Benson, a member of the Beaver Lake Cree Nation, has served as a Suncor director since 2000.
In his remarks to shareholders, Williams cited the company’s partnerships with First Nations established in 2016, including agreements with the Fort McKay and Mikisiw Cree First Nations, who hold a combined 49 per cent equity interest in the East Tank Farm Development at Fort Hills.
Williams categorized that as a “monumental deal” that sets an important precedent for the future. This echoes a growing sentiment that successful resource development in Canada means the de facto involvement of indigenous peoples — beyond only consultation.
For its part, Suncor has committed to increasing the recruitment, training and development of First Nations over the next decade.
“We need to change the way we think and act in order for Aboriginal peoples to play a greater role in energy development,” said Williams.
That added to the forwardlooking commentary of where the company is going in terms of lowering emissions, growth, cost reduction and its commitments to develop technology through its membership in the Canadian Oil Sands Innovation Alliance.
Where it was arguably looking backwards was in its decision to buy back shares.
Former Talisman CEO Jim Buckee liked the metric of boosting production per share. You can do that when you buy back shares but haven’t really done anything to increase actual production.
Some investors see it as a company showing confidence in its long-term prospects. Others call it financial engineering.
While it’s important for companies to do when share prices are not reflective of underlying value — and more importantly, when they don’t have huge capital commitments — it’s tough to argue it creates tangible, long-term value.
Suncor is in something of a different position since its big capital commitments, such as Fort Hills and Hebron offshore, are coming to an end and, as Williams said, new organic investments in the short term are unlikely.
But there is always the option of paying down debt to keep the powder dry, so to speak, and to increase balance sheet capacity or boost dividends (which Suncor did), rather than buy back shares. If Warren Buffett was still a Suncor shareholder — he sold the last of his position in the third quarter of 2016 — would Suncor be doing this?
The irony is that Ferguson said Wednesday he’d rather use his financial capacity to acquire assets rather than buy back shares. But, unlike Cenovus, the market seems to be favouring the Suncor narrative. On a day when energy shares suffered, Suncor’s shares gained 12 cents to close at $41.75. Cenovus dropped 46 cents to $13.55.
One unforeseen advantage has emerged from the foreign exodus from the oilsands — there is a new alignment of interests between industry and Canadian governments to help them succeed.
That’s the view of Steve Williams, president and CEO of Suncor Energy Inc., Canada’s largest oil and gas company, who started the Canadian consolidation trend last year by acquiring a control position in competitor Syncrude Canada Ltd. Other major deals followed — including the purchase of Royal Dutch Shell PLC’s oilsands assets by Canadian Natural Resources Ltd., and the purchase of ConocoPhillips’ oilsands assets by Cenovus Energy Inc.
Canadian companies are now in charge of about 70 per cent of oilsands production, and some have become so large they are giants of the Canadian economy. (Among the producers, Suncor has a market value of about $70 billion and Canadian Natural of $50 billion; in the pipeline group, Enbridge Inc. has a market value of about $90 billion and TransCanada Corp. of about $55 billion).
That alignment means governments have to be more responsive about threats to their competitiveness, such as those coming from the United States, Williams said to reporters Thursday in Calgary after addressing the annual meeting of shareholders.
Suncor, Canada’s largest oilsands operator, had just reported a better-than-expected $1.3 billion profit for the first quarter, compared to $257 million in the same period a year ago, on higher crude prices, lower costs, and asset sales, reinforcing that the sector has rebounded from the oil shock and can make money even at US$50-a-barrel oil.
The Canadianization of the oilsands “from where I stand it’s a good thing,” Williams said. “It aligns the Canadian interests. Now what we have (is) a Canadian resource, increasingly owned by Canadian corporations, working with Canadian provincial and federal governments to try and get the proper access with absolutely the right environmental standards to market. So you get a bit of a Canadian brand on that and I like that, (but there is a need to look) after the Canadian interests, because this is a very competitive world and we have to do some of that.”
Williams also likes that Canadian companies made “relatively good” deals, and that consolidation among a handful of companies for which production from the deposits is a core business means better supply chains, better connectivity, and more motivation to work co-operatively to make the business more efficient.
But with the administration of Donald Trump proposing major corporate tax cuts, rolling back regulations and threatening to pull out of NAFTA, the sector risks losing access to capital, he said, a message Suncor has been taking to governments.
“We compete internationally for our capital and that gets more difficult if there are other jurisdictions that are either more supportive around either regulation or taxation,” Williams said. “So, it’s really important that both at the provincial and federal level we retain our competitiveness.”
Even Canadian climate change plans, which Suncor supports, imply that Canada needs to be flexible to protect its competitive position, he said. Alberta’s carbon tax costs Suncor about 60 cents a barrel, Williams told shareholders.
While Trump’s tough talk has resulted in an overhang on Canadian stock prices, Williams doubts the U.S. administration will do anything to harm Canadian oil and gas.
Even with the surge in U.S. light oil supplies, refineries in the Gulf of Mexico still need heavy oil, which has been tougher to get due to declining production in Mexico and Venezuela.
“I am optimistic the right things will happen,” Williams said. “I think there will be some positioning, some posturing. Maybe the best indicator we have got is that after all of the discussion, one of the very first things that president Trump did was approve the Presidential Permit for Keystone XL” pipeline.
The company said its earnings were helped by an unrealized after-tax foreign exchange gain of $103 million on the revaluation of U.S. dollar denominated debt and after-tax gains of $437 million on the sale of its lubricants business and interest in the Cedar Point wind facility in Ontario. Its operating profit, which excludes one-time items, was $812 million, compared to a loss of $500 million, a year ago.
Suncor’s operating costs to produce a barrel of oil dropped to $22.45 from $24.50 during the quarter — or about US$17 a barrel — and the plan is to push those below $20 a barrel.
“We have permanently adjusted them down,” Williams shareholders. The CEO expects the international exodus to continue, as companies like BP PLC, Chevron Corp. and Total SA evaluate their positions, though Suncor doesn’t need to make another deal and its priority is to return cash to shareholders.