Activist U.S. hedge fund seeks overhaul of Suncor Energy

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Activist hedge fund Elliott Investment Management LP is pushing for a shakeup of Suncor Energy Inc., SU-T launching a campaign to oust several directors at the major oil sands producer and explore a sale of its Petro-Canada gas station chain.

Suncor’s share price, which has underperformed rivals since 2020, soared by 11.8 per cent after Florida-based Elliott revealed it is one of the company’s largest shareholders, with a 3.4-per-cent stake. Elliott wants to elect five new directors to Calgary-based Suncor’s 10-member board, four of whom are Canadian, and all with energy sector experience.

The fund manager doesn’t believe Suncor chief executive officer Mark Little, who took the helm in 2019, should remain as CEO, but wants a reconstituted board to ultimately make that decision, according to sources familiar with the situation. The Globe and Mail is not naming these sources because they are not permitted to speak publicly for the hedge fund.

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Elliott is one of the largest U.S. hedge funds, and over four decades founder Paul Singer and his colleagues have won showdowns with companies such as Twitter Inc., AT&T Inc. and Samsung Electronics Co. In recent years, Elliott successfully pressed Marathon Petroleum Corp. into selling its 3,800 gas stations to 7-Eleven Inc. for US$21-billion.

In a letter to Suncor directors, Elliott said its proposals would add $30-billion to the energy company’s market capitalization, “a potential increase of 50 per cent or more from today.”

In response, Suncor said in a press release the company “appreciates the views of its shareholders and will take the time to carefully assess the recommendations and materials provided.”

“Suncor’s board and management team looks forward to engaging with Elliott in due course to better understand their perspective,” Suncor said. “We remain confident in the company’s strategy for continued growth.”

Elliott said Suncor should improve the efficiency of its Alberta oil sands operations to match that of peers, increase the amount of cash it returns to investors through share buybacks and dividend increases, and “explore opportunities to unlock the value of high-multiple assets outside of its core oil sands business, including a strategic review of retail.”

Suncor owns one of the country’s largest networks of gas stations, with 1,800 Petro-Canada locations. In its presentation, Elliott said the retail division represents $5-billion in “trapped value.” The fund manager said over the past decade, a number of large energy companies – including Marathon, Imperial Oil Ltd. and Valero Energy Corp. – sold gas stations and subsequently improved financial performance.

Petro-Canada could fetch up to $10-billion if Suncor decides to sell the division, according to report on Wednesday from analyst Peter Sklar at BMO Capital Markets. He said Montreal-based Alimentation Couche-Tard Inc., one of the world’s largest convenience store chains, is the logical buyer.

Given the competition issues facing any bid for Petro-Canada from Couche Tarde, analysts said gas station operators Parkland Corp. and 7-Eleven would also likely bid for Petro-Canada properties if Suncor puts them up for sale.

However, to date, Suncor has been resistant to jettison its familiar Maple Leaf-logoed retail network, citing the value of the national brand, which is also associated with its sponsorship of Canadian amateur sport, and the vertical integration it offers with its production and refining operations. The company also touts its nationwide charging network for electric vehicles.

In launching its activist campaign, Elliott said Suncor’s stock market performance has lagged that of peers such as Canadian Natural Resources Ltd., Cenovus Energy Inc. and Imperial Oil over the past two years.

“We have considerable respect for Suncor,” said Elliott partner John Pike and portfolio manager Mike Tomkins in the board letter. “However, in recent years, the company has seen a decline in the exceptional performance that was formerly its hallmark. Suncor now finds itself plagued by repeated operational challenges and safety issues.”

In a presentation, Elliott pointed out that over the past seven years, 12 employees and contractors have died working at Suncor sites. Over the same period, Canadian Natural reported four fatalities, Cenovus had one workplace death and Imperial Oil didn’t have any fatalities.

The fund manager said Suncor has a “slow-moving, overly bureaucratic corporate culture” and criticized the board for increasing executive pay in the face of safety issues. Elliott said: “CEO compensation levels over the past few years suggest the board is not sufficiently holding management accountable for current performance.”

Suncor’s Mr. Little made $11.80-million last year, up 16.4 per cent from $10.14-million in 2020 compensation. In its presentation, Elliott quoted a report from proxy advisory firm Glass Lewis & Co. that said: “Overall, the company paid moderately less than its peers, but performed significantly worse than its peers.”

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