Suncor opts to keep its Petro-Canada gas stations in rebuff to activist investor

gas prices and carbon tax
gas prices and carbon tax

Suncor Energy Inc. has announced it won’t sell off its Petro-Canada gas stations following a strategic review of its downstream retail business, ending months of speculation prompted by public statements made by activist investor Elliott Investment Management LP urging the oilsands major to sell.

The Calgary-based oil company first announced last July it would explore the sale of its gas station network after reaching an agreement with Elliott which had publicly called for a shakeup at the company over missed production targets and Suncor’s poor safety record and share price performance compared to its peers.

The U.S. investor had also floated the possibility of Suncor spinning off its more than 1,500 gas stations and stores under the Petro-Canada banner, which have previously been valued at between $5 billion and $8 billion — a suggestion that was opposed by former CEO Mark Little, who said the retail chain helped make its downstream business one of the best in North America and supplied valuable market information.

Many investors in the company were also skeptical of the benefit in selling off Petro-Canada since the retail segment helped to stabilize cash flows despite volatility in the price of oil.

Tuesday morning Suncor confirmed it will retain its Petro-Canada network and will look to increase earnings by improving and optimizing the segment and expanding partnerships with non-fuel related businesses, including quick service restaurants, convenience stores and green offerings.

Interim CEO Kris Smith said Suncor’s retail business is particularly valuable during commodity price downturns, pointing to the stable cash flows Petro-Canada generated in 2020 when energy prices briefly dipped into negative territory in response to COVID-19 lockdowns.

“Our Petro-Canada business is part of Suncor fully maximizing the value of each barrel and capturing incremental margin above refinery cracks,” Smith said.

“This downside protection strengthens the resilience of Suncor’s integrated model by generating cash flows through the commodity cycles.”

The board committee struck to evaluate the possibility of a sale reviewed Suncor’s current integrated model, case studies from peers, studies of the future of retail in Canada and Petro-Canada’s own growth plans.

Suncor’s board also reviewed preliminary indications of interest from a global set of third parties in the gas station business, according to Suncor. The review pointed to Petro-Canada’s sizeable fuel loyalty program, and the fact that with 18 per cent of Canadian retail fuel sales, Petro-Canada holds the top spot for a Canadian brand in market share, according to fuel and convenience analytics firm Kalibrate.

Smith added that while the company expects gasoline demand to decline over the long term, the maintenance of its retail business will provide demand security for production from Suncor’s refineries.

Suncor’s announcement came as no surprise to some analysts who weren’t keen on the idea of a sale — even if many agreed with some of Elliott’s other criticisms of the company.

“(W)e do not see the retail segment as being an issue operationally and believe the asset provides outsized strategic value within the existing organizational structure,” said National Bank of Canada’s Travis Wood in a research note. “We will, however, look for commentary and details on how the company plans to improve reliability and uptime at its core upstream assets, notably across Syncrude and Fort Hills.”

During a presentation to investors Tuesday, the company updated efforts to improve safety and operational performance at its downstream assets, including progress on plans to slash its contract workforce by 20 per cent by mid-2023 in order to reduce the potential for accident and injury.

Smith also said the company would double the weighting of the safety component in Suncor’s annual incentive program. “Make no mistake, we’re fully committed to improving our safety performance and ensuring all our workers go home safely each and every day,” Smith said.

Elliott issued a public letter in April calling for a shakeup of the board of directors at the oilsands company. The U.S. investment firm publicly sought a review of management and assets, pointing to Suncor’s missed upstream production targets and poor safety record in recent years, including an estimated 13 workplace deaths since 2014.

Little resigned in July after another Suncor worker died in a northern Alberta mine. The company said in its third-quarter earnings call on Nov. 3 that it would increase safety measures at its oilsands operations by reducing the number of contractors and upgrading its technology.

Tuesday the company also announced a $5.6-billion capital spending program for 2023 and a mid-point production target of 755,000 barrels per day — a figure which was below Bloomberg Street consensus.

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