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Suncor Energy facility is seen in Sherwood Park, Alta., August 21, 2019.

CANDACE ELLIOTT/Reuters

Big energy companies are looking increasingly vulnerable to activists, who are pushing for limits on carbon emissions as the world gets serious about tackling global warming. Where does this leave investments tied to the Canadian oil sands?

Though surging oil prices and recovering economic activity have supported the share prices of Canadian energy stocks this year, the tumultuous events of the past week are still reverberating through markets.

On May 26, a little-known hedge fund called Engine No. 1 succeeded in replacing at least two board members at Exxon Mobil Corp. , with support from large institutional players pushing for a faster transition toward renewable energy.

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On the same day, a Dutch court ordered Royal Dutch Shell PLC to slash its carbon emissions by 45 per cent by 2030, compared with 2019 levels. That’s far more drastic than the energy giant’s own target for cutting emissions and could push Shell to jettison assets and curb development projects.

It’s enough change to raise the question of whether traditional Canadian energy stocks, such as Suncor Energy Inc. and Canadian Natural Resources Ltd. , are losing their long-term appeal.

Projected surge in energy investment sparks calls for focus on renewables

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However, there are several reasons why investors can relax, and perhaps even welcome the changes that are coming.

For starters, the activist investors driving changes at Exxon are concerned about positioning the company for an energy transition, rather than pulling the plug on oil production immediately.

Engine No. 1, the hedge fund, believes that investing in cleaner energy sources at a faster pace will put Exxon on a path toward what it called “long-term sustainable value creation” – a goal that can resonate with other energy companies.

Jamie Bonham, director of corporate engagement at NEI Investments, an asset manager that focuses on responsible investing, said that the key here is that energy companies can leverage their existing strengths – including engineering skills and the ability to manage industrial-scale projects in harsh conditions – to expand into complex renewable energy projects.

“Investors are finally coming around to this idea that I don’t have to just own an oil and gas company. I can own a company that is going to be a going concern 20 or 30 years from now,” Mr. Bonham said.

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Canadian companies appear to be especially well-positioned here, given that some are well ahead of their global peers in laying out strategies for cutting emissions and diversifying beyond crude oil.

Mr. Bonham singled out Suncor’s plan, which includes investing in low carbon power, hydrogen and renewable liquid fuels that can help power the company’s traditional operations in a more sustainable way. Under this approach, the company is a consumer of its own renewable energy.

Energy investors can also take comfort from the likelihood that the changes facing energy companies, even if they are accelerating, will unfold slowly as the world transitions to cleaner fuels.

“None of this is going to happen overnight,” said Fai Lee, an equity analyst at Odlum Brown, an investment firm, who applauds energy companies for reducing emissions and raising their exposure to renewable energy.

“It’s good to see them take climate change seriously,” Mr. Lee said. “They’re not sitting around, waiting for the world to change.”

For investors, that’s okay. Companies will make a pile of money if the price of oil remains high. They can direct some of these profits to expanding lower-carbon projects.

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In the meantime, a bet on oil looks relatively sound. That’s because some observers expect that demand for crude will remain strong, even as alternatives emerge.

Randy Ollenberger, an analyst at BMO Capital Markets, expects demand for oil will rise for at least another 10 years, driven by population growth, rising economic activity and a lack of widely available energy substitutes.

The price of oil could also spike higher if climate activists continue to target production, leading to a potential shortage of crude oil “as oil companies become increasingly reluctant to commit new capital amid growing environmental activism,” Mr. Ollenberger said in a May 25 note.

Under this scenario, more oil production might shift to national energy companies that don’t answer to shareholders – and, of course, the Organization of Petroleum Exporting Countries (OPEC).

While that sounds like a grim outlook for Canada’s publicly traded energy sector, Rafi Tahmazian, senior portfolio manager at Canoe Financial, an independent mutual fund company, is optimistic that the sector will prevail.

ESG principles (environmental, social, governance) are generally higher among Canadian energy companies than overseas competitors, which should raise their appeal. And, he added, it seems unlikely that North America will want to surrender its energy security to less stable oil-producing regions.

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“The world is going to recognize the value of having oil in our backyard,” Mr. Tahmazian said.

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