One of the most aggressive activist investors in North America has turned its attention to Suncor Energy Inc., seeking major repairs to the company’s board and management team, along with a possible sale to Petro-Canada.
In a letter to Suncor on Thursday, US-based Elliott Investment Management expressed disappointment with what it said was a recent drop in the energy producer’s performance.
“Obviously, Suncor’s status quo doesn’t work,” Elliott partner John Pike and portfolio manager Mike Tomkins wrote in a letter.
Shareholders have noted that their investments are lagging behind almost all major North American oil and gas companies, as Suncor’s share price has remained virtually unchanged since early 2019, even as oil prices rose to their highest level since almost a decade.
Suncor, which was Canada’s most valuable energy company by market capitalization from 2000 to 2018, has been in decline recently. Elliott’s letter said the company’s share price was lagging behind that of its closest counterpart, Canadian Natural Resources Ltd., by 137 percent over the past three years.
The company is also plagued by a recent series of operational difficulties – omission of corporate production guidelines due to equipment damage and cold weather – as well as significant workplace safety concerns. Since 2014, there have been 12 deaths in the workplace at Suncor’s sites, which according to Elliott is more than all of the company’s closest colleagues combined.
In their letter, Pike and Tomkins said all of these problems were rooted in what they called “Suncor’s slow, overly bureaucratic corporate culture.”
Elliot Investment Management is a well-known activist investor with about $ 51.5 billion in assets under management. It has previously targeted large corporations such as AT&T, Hyundai and Softbank.
He has a 3.4% economic stake, including shares and contracts for cash-settled derivatives, in the Calgary-based company.
In his letter, Elliott outlined his proposal for Suncor, which includes adding five new independent directors to the company’s board and then undertaking 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 oil sands business. Opportunities could include the potential sale or separation of Suncor’s retail network in Petro-Canada with 1,800 locations.
Elliott will have done his research and is well aware that other Suncor investors are also unhappy, said Josh Young, chief investment officer and founder of Bison Investments, an oil and gas-focused investment firm based in Houston, Texas.
Young pointed out that Suncor reduced its dividend by more than 50 percent in the fall of 2020, while Canadian Natural Resources Ltd. has managed to maintain its dividend despite market challenges.
“Even if Elliott doesn’t own much of the stock, they’ve probably correctly identified that many of Suncor’s shareholders would be interested in a change,” Young said.
More active investment activity in the oil and gas sector is possible
Young said that while activist investors have not had much success with oil and gas companies in the past, some are likely to take a fresh look at the sector now, given high oil prices and the industry’s positive market fundamentals in the short term.
“It makes sense that activist investors get everything from the market to divert and look for low-hanging fruit,” he said. “And Suncor is pretty obvious – you have to be a big fund to direct them, but that’s a pretty obvious goal.”
Young added that it would not be surprising to see more activist investment activity in the oil and gas sector, now that the ice is broken.
“It seems more feasible now that Elliot has done it,” Young said.
In their letter, Pike and Tomkins said they look forward to engaging with the board, along with fellow shareholders, and hope to meet with the board as soon as possible.
Suncor’s share price rose $ 4.74, or 11.3%, to $ 46.90 in mid-afternoon trading on the Toronto Stock Exchange on Thursday.
Elliott said he believed his offer of Suncor could lead to a share price of $ 60 or more, an approximately 50% increase in shareholder value.
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