Suncor Energy Inc. SU-T faces a company-transforming choice: Whether to garner billions of dollars in one-time proceeds from a sale of Petro-Canada or keep reaping the long-term benefits of a storied national brand in an evolving retail gasoline industry.
Suncor and U.S. activist investor Elliott Investment Management Inc. announced a deal on Monday in which they said the company could divest the 1,500-site retail network “with the goal of unlocking shareholder value.” Elliott has pegged the value of the nationwide business at $4.7-billion to $9-billion.
As part of its agreement, Suncor named three new independent directors to its board. Two of them, Jackie Sheppard and Chris Seasons, are Canadian oil patch veterans who will oversee a strategic review of Petro-Canada. The process is to be complete by December.
After more than four decades, the Petro-Canada brand sits alongside such others as Tim Hortons and Canadian Tire CTC-T as part of the national fabric. But the industry’s structure has shifted, with integrated oil companies giving way to the rise of independent retailers.
Meanwhile, electric vehicles are a wild card in the long-term future of gasoline retailing, said David Finch, a marketing professor at Mount Royal University in Calgary. The speed at which consumers adopt EVs adds uncertainty to the mix.
So, any buyer of Petro-Canada is at risk of taking over gas pumps, reservoirs and other infrastructure that could one day become obsolete as cars and trucks electrify.
Some analysts question the need for a sale at all. Suncor would have few places to deploy proceeds. Oil sands producers have been loath to undertake new multibillion-dollar projects, blaming escalating development costs and limited pipeline capacity to export the oil. More importantly, the industry faces increasing restrictions on carbon emissions as Canada seeks to get to net zero by 2040. Suncor is part of an industry coalition with a goal to achieve that through carbon capture and other technology.
A review is useful, but parting with assets may not be the best outcome, said Menno Hulshof, analyst at Toronto-Dominion Bank. Mr. Hulshof pointed out that Suncor’s downstream business leads the industry in refinery reliability and profit margins. The marketing division, which offers secure and trackable supply, has played a key role.
Suncor doesn’t require a big influx of cash to pay down debt, so “outsized shareholder returns” in the form of share buybacks and dividends would be likely, he wrote in a research note.
Several companies have jettisoned their Canadian retail networks in recent years, such as Imperial Oil Ltd. IMO-T, Cenovus Energy Inc. CVE-T and Chevron Corp CVX-N. Alimentation Couche-Tard Inc. ATD-T, Parkland Corp. PKI-T and 7-Eleven have been buyers.
Former Suncor chief executive Mark Little had always said the business – which Suncor acquired in a 2009 takeover – was integral to the continent’s best refining and marketing operation. At last count, it accounts for 11 per cent of Canada’s gas stations.
Mr. Little resigned this month after the latest fatality in the company’s oil sands operations. Safety lapses and frequent operational outages were key criticisms when Elliott launched its campaign for a corporate shakeup in April. It floated the idea of selling Petro-Canada then.
Couche-Tard is widely seen as a logical buyer. It is likely, however, that antitrust concerns could prevent it from acquiring the whole network, leaving other companies, such as Parkland, to scoop up parts where there is little overlap.
Executive chair and founder Alain Bouchard has turned Couche-Tard into a leading consolidator, and the company has expanded its store count and revenue dramatically through acquisitions in the United States and Europe.
Couche-Tard operates some 14,000 stores in 26 countries, including 2,100 in Canada, mostly under the Circle K brand. The company hasn’t made a major acquisition since buying Texas-based CST Brands Inc. for US$4.4-billion in 2017 and appears hungry for a deal if the price is right.
Jennifer Vincent, a Couche-Tard spokesperson, declined to comment on whether a deal was possible.
Simon Scott, a spokesperson for Calgary-based Parkland, another fast-growing independent that sells gasoline in Canada, the U.S. and the Caribbean under such banners as Esso, Chevron and Ultramar, also declined to comment on its level of interest.
The neighbourhood gas station has already changed from a limited-hour, relatively predictable business to an all-day, all-night operation marrying fuel with food and other conveniences. Beyond that, the real estate today is expensive and difficult to develop, environmental risk continues to grow and petroleum equipment, both below and above ground, has become incredibly complex and expensive, according to industry consultant Jim Woods of Burlington, Ont.-based Woods Consulting.
When it was established as a Crown corporation in the 1970s and acquired several companies, Petro-Canada was a symbol of federal incursion into Alberta’s energy wealth. It softened its image in the West with its sponsorship of the 1988 Calgary Winter Olympics and it remains known for its support of amateur sport. The company also has a cross-Canada network of charging stations for EVs.
The strength of the brand as part of a national network provides a significant amount of value, Prof. Finch said. “If a company like Parkland or Couche-Tard is going to be looking at it, the minute you start breaking up the asset, you start removing the value of the brand and then it becomes a very questionable spinoff,” he said.
Besides a sale, Suncor could opt for an initial public offering as a way to keep the network whole while offering direct ownership for investors, Prof. Finch said.
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