Suncor Energy Inc. has rolled out plans to buy back up to $1-billion worth of its own stock, reinforcing its new focus on financial returns rather than production growth.
Along with its competitors, Suncor faces rising construction costs at a time when its stock is languishing, meaning executives can either spend on expensive projects or buy what they view as cheap shares.
The share-buyback program announced Tuesday comes as Steve Williams, Suncor's new chief executive officer and a former chief financial officer, charts his own path for Canada's largest energy firm. This is only the second time in its 20-year-history that Suncor has announced plans to purchase shares, although the company has consistently raised its quarterly dividend.
Mr. Williams has said he is not interested in growth at any cost, and this second buyback program proves he willing to shift Suncor's spending away from expansion efforts in order to benefit shareholders. At the same time, the move also shows Suncor believes its existing projects can spin off enough cash to fund the growth projects Mr. Williams does want to pursue, all while addressing its soggy stock price.
Suncor, an oil sands pioneer that built Canada's first oil sands mines and processing equipment when low oil prices meant financial pain, in July scotched plans to produce one million barrels of oil a day by 2020. This marked Mr. Williams' first major break from his Rick George, his predecessor.
This second buyback – the first $1.5-billion was announced under Mr. George's tenure and continued under Mr. Williams' leadership – demonstrates Mr. Williams' determination to bolster the company's stock.
Phil Skolnick, an analyst at Canaccord Genuity, said Mr. Williams is putting "his stamp on the company.
They are looking at the best use of cash, be it investing in projects, buyback shares, or increasing dividends. He's basically trying to do all three."
Because Mr. Williams nixed Suncor's 2020 production target, he needs to find other ways to spend the company's $5.166-billion in cash, Mr. Skolnick said.
However, Suncor says the buyback does not mean it is sacrificing growth plans.
"It is not one or the other," Suncor spokeswoman Sneh Seetal said, noting funding growth remains one of the company's priorities. "Right now we see our shares as one of the best investments we can make today."
Observers are at odds over whether Suncor's competitors will follow its lead.
On one hand, Mr. Skolnick said other oil sands companies may choose to do share buybacks as a way to strengthen their companies when expansion looks too risky because of rising costs such as labour. On the other hand, Randy Ollenberger, an analyst at BMO Nesbitt Burns Inc., believes Suncor held off on buying back shares until it achieved a certain size.
"For Suncor, it is more where they are in their growth profile and size of the company that they can kind of pursue this strategy," he said. By comparison, Canadian Natural Resources Ltd. has said it will buy back shares when it has surplus cash, but that its first priority is growth, Mr. Ollenberger said.
Suncor's first buyback came with a so-called put option which gave Suncor the right to sell its shares back to an unnamed institution at a specified price – a move that irritated some investors. Ms. Seetal said this buyback plan does not have a similar clause. Suncor has until September, 2013, to execute this buyback plan.
While Suncor is returning money to shareholders through buybacks and higher dividends, Mr. Ollenberger agreed Suncor does not have to give up on growth. "It is a comment [on Suncor's ability] that they can do both."