Do same at Canadian Natural Resources Ltd. CNQ-N, the largest domestic energy company, and up pops a picture of a pipeline. On Suncor Energy Inc.’s SU-T site, you’ll find a refinery worker, decked out in a hardhat and safety googles.
The contrast speaks to very different approaches to the same challenge – climate change. To cut green house gas emissions, U.K.-based Shell and BP are plowing the billions of dollars generated from their fossil fuel operations into renewable energy. Hence, the prominence given to wind farms.
At Canadian Natural, Suncor and other domestic oil sands plays, the plan is to reduce emissions by reinvesting a portion of their cash flow into technology such as carbon capture. Any excess money is earmarked for investors, in the form of stock buybacks and dividends.
While you would be hard pressed to get Calgary-based oil executives to admit it, the reality is that Canada’s largest oil and gas producers don’t bother to greenwash their websites because they don’t need to.
Major oil sands players such as Canadian Natural and Suncor now generate so much cash that they are self-financing. After raising billions of dollars over five decades to develop massive Alberta projects, these companies are in the fortunate position of no longer needing to tap equity markets or lenders for the capital to expand.
A generation back, news that a major bank such as HSBC or influential pension plan like the Caisse de dépôt et placement du Québec was turning off the tap for oil sands projects would have rocked Calgary. Today, it’s a non-event. The likes of Canadian Natural no longer need anyone else’s money, or approval, to prosper.
And unlike Shell and BP, which must constantly find new energy sources to replace depleted reserves, the oil sands producers are also in the fortunate position of working deposits with lifespans measured in decades.
A recent report from analyst Jason Bouvier at Scotia Capital said that across Alberta’s oil sands, the six major producers will likely spend an average of $2.5-billion annually to meet their shared goal of net zero emissions by 2050.
While that’s a great deal of money, Mr. Bouvier pointed out that it amounts to $765-million in annual spending at Canadian Natural, which faces the largest costs, against the company’s projected $10-billion of free cash flow this year. He also said he expects the federal Liberals to allocate significant funds for oil patch emissions reduction in the coming budget, reducing the burden on industry.
BP, on the other hand, says it expects to spend up to US$5-billion annually building its renewable business, while Shell is promising to drop as much as US$3-billion on going green. In recent years, business professors coined a term for what happens when executives who are good at one line of business – say, fossil fuels – start pouring capital into another sector. They called it “diworsification.” It’s the reason conglomerates get busted up and CEOs get fired. Every sector has an example of a successful company making a misguided foray into a new field.
The stock market offers a daily score card on corporate strategy. Right now, senior Canadian energy companies are outperforming their European peers by a significant margin, according to a report last week from RBC Capital Markets. As they shift their mix of businesses, Shell, BP and five other major European oil and gas stocks are valued at 3.8 times their forecast 2022 cash flow per share.
That’s well below the valuation on the seven largest North American companies, a list that includes Canadian Natural, Suncor, Cenovus Energy Inc. CVE-T and Imperial Oil Ltd. IMO-T The group trades at 5.2 times their projected cash flow, according to RBC.
On a website, share buyback and dividend hikes don’t have the same visual appeal as investments in wind farms or solar power plants. However, as Canada’s oil sands players reap the rewards of decades of investment, while reducing emissions, investors are taking notice.
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