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The clash between one of Canada's flagship energy companies and an American activist hedge fund has gone quiet in recent weeks, leaving Suncor Energy (SU.TO)(SU) shareholders wondering what's next in Elliott Investment Management's push for change at the pioneering oil sands producer.
Bay Street money managers are now questioning elements of Elliott's plan, as Suncor stock continues to break 52-week highs.
The Florida-based firm, known to instill fear in the hearts of executives, called out Calgary-based Suncor's management nearly a month ago. Its grievances range from an "unacceptable" safety record in the wake of job site fatalities, to disappointing operational performance, to a stock price that's underperformed Canadian peers.
Elliott's plan, as published on the website RestoreSuncor.com, promises to "unlock" more than $30 billion in value for shareholders.The firm, which claims to have a 3.4 per cent stake in the company, has asked for five directors to be added to the board, as well as a strategic review of the executive management team, including CEO Mark Little. It's also called for Suncor to review its ownership of Petro-Canada, a roughly 1,600-location gas station chain that Elliott believes would net a hefty profit from a strategic buyer.
While Suncor has said the two sides will engage in talks, Little has flatly rejected Elliott's call to explore the sale of its retail business. A spokesperson for Suncor says the company will "take the time to fully assess Elliott's recommendations to determine the best path forward" with the goal of maximizing shareholder returns.
"The board and management team looks forward to ongoing constructive discussions with Elliott to better understand their perspective," Leithan Slade wrote in an email on Thursday. "As a general rule, those conversations are confidential."
An Elliott spokesperson declined to elaborate on the status of the talks in an email to Yahoo Finance Canada on Wednesday.
Meanwhile, Toronto-listed shares have hit 52-week highs since Elliott went public with its activist campaign in late-April. Suncor's stock is now outpacing Canadian Natural Resources (CNQ.TO)(CNQ) on a year-to-date basis. Elliott referenced that company's shares in its plan to illustrate Suncor's relative underperformance. With oil prices running at multi-year highs, Suncor's first-quarter financial results were another recent bright spot for the company.
Michael Sprung, president of Sprung Investment Management and a Suncor shareholder for clients, expects the company will resist changes to its management. As for the fate of Petro-Canada, he sees greater value in leaving Canada's largest integrated energy firm intact.
"I'm not sure that I see Elliott having a great deal of success in the long run in this particular venture," he said in an interview. "It just sounds to me like they're rather at an impasse."
Sprung says Petro-Canada would likely fetch a higher valuation if it were spun out from Suncor. But like Little, he believes the retail business is an important link in the company's well-to-gas pump value chain.
"[Petro-Canada is] probably undervalued within the umbrella of Suncor right now. You always see that conglomerate discount," he said. "But I don't think I'd like to see them split the company into upstream and downstream. There is value in having both. It's added stability."
In 2019, Petro-Canada announced the completion of a coast-to-coast network of fast electric-vehicle chargers dubbed "Canada's Electric Highway." Sprung says this adds an additional layer of value as consumers pivot to non-internal combustion vehicles.
Let’s face it, as activist investors, they’ll just move on to the next project if this one doesn’t work out.Michael Sprung, president of Sprung Investment Management
While the company's retail locations have turned an eye to electric vehicles, Suncor was once a pioneer in oil sands development. Its Base Plant north of Fort McMurray, Alta. was the first commercially successful, large-scale project when it came online in 1967. Greg Taylor, chief investment officer at Purpose Investments, says old assets are among the company's biggest challenges today.
"These are assets that have been operating 10 to 20 years longer than some of the other assets [in the industry]," he said in an interview. "While they are still going to generate a lot of cash, they're not going to be able to change them to be as efficient as the new ones overnight. You can't just flick a switch and make them newer."
Taylor says oil and gas companies are "tricky" targets for activists by their nature, due to the physical scale and long life of their assets. On the issue of potentially spinning out Petro-Canada, he doubts Elliott's "traditional hedge fund sum-of-the-parts analysis" will lead to a sale.
"It's really strategic for Suncor to have those stations. Getting rid of them would be detrimental to the overall operation of the company," he said.
"There are players out there, like Parkland or 7-Eleven, that could look at it. But ultimately, I think this is probably going to remain in Suncor's hands," he added, when asked about potential buyers. "We've seen Alimentation Couche-Tard already do a lot of deals in the space to consolidate in Canada and the U.S. It probably would be tough for them to buy those assets."
Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management, called the potential sale of downstream assets a "dead issue" in an email to Yahoo Finance Canada.
In its plan, Elliott cites Imperial Oil (IMO.TO)(IMO), Valero Energy (VLO), and Marathon Petroleum (MPC) as examples of oil companies that successfully exited their retail businesses without degrading their refining performance.
Both Sprung and Taylor agree that Elliott has put a brighter spotlight on the well-known issues at Suncor. However, they remain skeptical of sweeping changes being forced upon the company.
"Maybe Elliott gets a position on the board or something. But I don't think they're going to really get anything that they wanted to see out of it," Sprung said. "Let's face it, as activist investors, they'll just move on to the next project if this one doesn't work out."
"Elliott is highlighting issues, and certainly management and the board will address them," Taylor said. "I would expect this is something that really just fades away over time."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.