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Suncor's Ft. McMurray oil sands plant vents steam on Sept. 11, 2001.Jeff McIntosh/The Globe and Mail

Suncor Energy Inc.’s SU-T board of directors is making it easy for activist Elliott Investment Management LP to win support for a shakeup at one of Canada’s largest energy companies.

Going into last year’s annual meeting, the Calgary-based oil and gas producer was on notice that institutional investors were unhappy with weak operational performance versus peers, including Suncor’s woeful safety record.

After three workplace fatalities at Suncor’s Alberta operations in December, 2020, and January, 2021, Britain’s largest pension plan manager went out of its way to explain why it voted against the board’s decisions on executive compensation.

Ahead of Suncor’s 2020 annual meeting last May, Royal London Asset Management, which invests a total of £159-billion for its clients and owns three million Suncor shares, said: “Given company fatalities, we have concerns over the discretionary adjustment to awards in relation to safety performance.”

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

Suncor’s directors awarded Suncor chief executive Mark Little a total of $10.1-million in 2020.

This January, another worker died in a truck crash at Suncor. The company’s accident rate rose compared with the previous year. Suncor’s operational and stock market performance continued to lag behind rivals such as Canadian Natural Resources Ltd., Cenovus Energy Inc. and Imperial Oil Ltd.

The board said the right things. In the proxy circular explaining the logic behind 2021 executive compensation, the directors said: “Safety is, and always has been, a core value for Suncor.” The directors also said: “We suffered some operating setbacks and recognize that we must do better.”

However, Suncor’s board increased executive compensation. This year, Mr. Little’s package includes a $1.96-million cash bonus that is 127 per cent of his target payment. In other words, the board signalled the CEO exceeded expectations. Mr. Little earned a total of $11.8-million.

Enter Elliott, with four decades of experience in how to combine exhaustive research with bare-knuckle tactics to overhaul boards and set new strategies at blue-chip companies such as AT&T Inc. and Marathon Petroleum Corp.

After building a 3.4-per-cent stake in Suncor, worth more than $2-billion, Elliott launched a campaign last week to put five new directors on Suncor’s 10-member board.

“Due to operational and safety issues, Suncor’s former premium valuation has given way to a deep discount,” said Elliott in a 45-slide presentation that detailed plans for each arm of the company. Across industries – from oil to logging, autos or construction – there’s a direct link between worker safety and financial performance. To ensure this is the case at one of the country’s dominant energy companies, Elliott said: “Suncor must properly account for safety in management compensation metrics.”

Once new directors are in place, the fund manager wants to see Suncor overhaul management, improve performance from its oil sands properties, return more cash to shareholders, and potentially sell off its 1,800 branch Petro-Canada gas station network, which analysts estimate is worth about $10-billion.

Elliott is demanding rigor that Suncor’s board, to date, has failed to show. That message is resonating with institutional investors.

Suncor’s stock price, which has underperformed peers since 2020, soared on news of the activist’s arrival. Last week, equity traders said long-term Suncor investors held on to their stakes, anticipating Elliott will succeed in improving performance, while hedge funds piled in, planning to ride the activist’s coattails.

National Bank Financial energy analyst Trevor Wood spoke for many of Suncor’s institutional shareholders on Friday when he said in a report: “We agree that change is required and are indifferent to the steps made to generate improved execution.”

What comes next? Last week, Suncor said its board and management will meet with Elliott “in due course.” The company hired proxy contest specialist Kingsdale Advisors to help deal with the activist’s campaign. Mr. Little and the board are expected to outline their strategy at Suncor’s annual meeting scheduled for May 10.

Will Elliott’s campaign to renew Suncor’s board succeed? Consider what happened back in 2011, when activist investor Bill Ackman’s Pershing Square Capital Management rode into Calgary, pushing for a revamped board and new CEO at a flagship company, Canadian Pacific Railway Ltd.

In the months that followed, Pershing Square’s plans won backing from CP Rail’s institutional investors – a show of support that surprised the railway’s directors. CP Rail’s stock price subsequently took flight; the activist campaign is considered an outstanding success for investors.

Suncor’s continuing safety and operational issues, and the resulting weakness in its valuation, leave its board vulnerable to the same revolution that reshaped CP Rail.

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