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Suncor Energy's head office in Calgary. Suncor’s stock has nearly doubled, but its underperformance sticks out in an industry now swimming in cash amid global energy shortages.CHRIS WATTIE/Reuters

Investors were grumbling about Suncor Energy Inc.’s SU-T operational and safety-related stumbles long before Elliott Investment Management LP went public with its campaign to agitate for change at the pioneering oil sands producer.

These problems, many involving the nuts-and-bolts challenges of trying to wring reliability out of aging assets, have been a drag on the performance of the major oil sands producer’s shares as competitors reaped richer rewards from surging oil prices.

This is where Elliott sees opportunity.

To be sure, Suncor is not tanking. Two years after oil plunged to historic lows amid pandemic-induced lockdowns, its stock has nearly doubled. But that’s well behind a more than 300-per-cent gain by sector leader Canadian Natural Resources Ltd CNQ-T. With just five sizable Canadian oil sands companies left, its underperformance sticks out in an industry now swimming in cash amid global energy shortages.

The question is whether the U.S. activist hedge fund’s prescription for a shakeup at the company is the right one to “unlock” as much as $30-billion in value as touted, or if its proposals to sell prized assets such as the maple-leaf-logoed Petro-Canada gas station chain would leave the Northern Alberta oil production business more vulnerable to the whims of a volatile energy market. In the end, the activist’s very presence may be enough to kickstart operational improvements and deliver more returns to shareholders.

“This is the concern about Suncor – they’re not moving fast enough for an industry that’s starting to fly,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial LP. “There have been too many of these quarters, where it’s, ‘Just give us another quarter.’ They’re already behind the eight ball in terms of distributing cash.”

Who is Elliott, the contentious investment firm trying to shake up Suncor?

On Thursday, Elliott said it had amassed a 3.4-per-cent stake in the $68-billion company and was pushing for five of its nominees to be named to the board of directors. The next steps would be a review of Suncor’s assets to determine which to sell, improvements in operations and workplace safety, higher payouts to shareholders and discussion about whether Mark Little should remain as chief executive officer.

The campaign has yet to erupt into a full-blown proxy fight – the investor says it wants to try to negotiate constructively. However, releasing to the public its letter to the board calling for change (along with an extensive slide deck) and setting up a website called “Restore Suncor” seem more like pressure tactics. This is a well-known strategy for activists, and Elliott could yet buy more stock or partner with other investors to get to the ownership threshold of 5 per cent necessary to call a special meeting to try to force change.

In the letter, Elliott partner John Pike and portfolio manager Mike Tomkins criticized missed production targets, high costs, employee fatalities and safety concerns stemming from what they said was “a slow-moving, overly bureaucratic corporate culture.”

With a stunningly large base of institutional shareholders, virtually all Canadians have a stake in Suncor’s success, whether it is from investments, company pension holdings or as beneficiaries of the Canada Pension Plan. In addition, Mr. Little, the CEO since 2019, has been instrumental in the oil sands industry’s push to get to net-zero carbon emissions.

Suncor shares rose 12 per cent on Thursday after Elliott released its board letter, but dipped 2.2 per cent on Friday. For its part, Suncor said on Thursday it “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,” it said a statement. “We remain confident in the company’s strategy for continued growth.”

Mr. Tahmazian points out that the U.S. activist investor recognizes the potential value in Suncor, and its calls for a shakeup are a marked contrast to Canadian institutions, which have not openly demanded change.

It was a rough winter for Suncor’s oil sands operations north of Fort McMurray, Alta. Two new chains that drive crushing equipment failed at Syncrude Canada’s Mildred Lake mine, which Suncor operates. Two critical furnaces at its Firebag steam-driven project broke down because of frozen air louvres. Together, the problems cut production by 195,000 barrels a day in the latter half of December.

Suncor has also seen a rash of safety incidents. On Jan. 6, a worker was killed when two heavy-haul trucks collided at its base plant. The crash sent two other workers to hospital.

Analysts have repeatedly expressed concern such incidents underscore deeper problems with Suncor’s operational record, prompting the company to beef up its management team in February to try and improve performance. It also released plans to deploy collision-mitigation technology commonly used in the global mining industry across its operations.

“As CEO, the accountability for safety and operational excellence is with me. Period. I own this,” Mr. Little said at the time.

A change at the top may be in the offing, said Laura Lau, chief investment officer with Brompton Group, which holds Suncor shares. Chief executives are “good for different times,” she said. Mr. Little made good acquisitions when low oil prices made it difficult to do deals, but “people are questioning is he the right one going forward” when it comes to growth and operational goals.

But it would be unfair to say that Suncor has not acted on making the necessary changes to run its oil sands facilities, the oldest of which began operations in the 1960s and 1970s, said Travis Wood, analyst at National Bank of Canada. The company has engaged consultants and has been working to fix its record, even if the changes have been slow to bear fruit.

He questions the rationale behind parting with the Petro-Canada retail business, which includes 1,800 locations and, by one estimate, could fetch $10-billion. Suncor’s refining and marketing divisions are among the continent’s best and represent premium value within Suncor’s integrated business model, he said. The focus should be on oil sands.

Given oil prices that have passed US$100 a barrel, the company’s stock could have been set for gains even without Elliott’s advance, he said.

“Good luck to them,” Mr. Wood said. “Maybe Suncor gets a kick in the butt because of this and they accelerate the value.”

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