One of Canada’s most valuable energy companies made a grand comeback in 2021 following the forgettable oil slump the year before. Suncor Energy (TSX:SU) had to slash dividends by 55% in 2020 to preserve cash and protect the balance sheet. The blue-chip stock also lost its Dividend Aristocrat status as a result.
Fast forward to December 2022, and the oil sands king has completed its redemption. If you own shares of Suncor Energy, hold the stock and don’t sell. The $58 billion integrated energy company has decided against divesting from or selling its Petro-Canada retail network. The decision is also a snub of an activist investor’s pressure on Suncor to let go of the more than 1,500 gas stations.
The strategic review is over
Suncor agreed with Elliott Investment Management LP, the activist investor, in July 2022 to explore selling the Petro-Canada assets. Its former chief executive officer (CEO), Mark Little, opposed the idea because he believed the retail chain is a key element of the business.
Unfortunately, Mr. Little resigned in the same month following the death of a contractor at Suncor’s Base Mine. Management went on to do a strategic review of Suncor’s downstream retail business. The comprehensive review is over on November 30, 2022, and the cat is finally out of the back.
Suncor formally announced that it wouldn’t sell its Petro-Canada gas stations. Its interim CEO, Kris Smith, said, “Our Petro-Canada business is part of Suncor fully maximizing the value of each barrel and capturing incremental margin above refinery cracks. This downside protection strengthens the resilience of Suncor’s integrated model by generating cash flows through the commodity cycles.”
Little had the same sentiment when he said then that Petro-Canada is intertwined with Suncor’s wholesale and industrial business. He added, “Petro-Canada is a very strong performer and can go head to head with other retail businesses.”
For Smith, the retail business is particularly valuable during commodity price downturns, because it generates stable cash flows. In 2020, Petro-Canada brought cash in when energy prices fell into negative territory.
New direction
Suncor’s rationale for retaining the retail business is noteworthy. Management plans to optimize the segment by improving and expanding partnerships with non-fuel-related businesses. Among the prospective partners are convenience stores and quick-service restaurants. The end goal of this new direction is to increase earnings.
Management aims to raise Petro-Canada’s profits by 40% by 2027. Suncor might close underperforming locations and enhance some stations with food, shopping, and energy transition offerings. Keeping the gas station network will provide a demand security for production from Suncor’s refineries, even if gasoline demand or fuel sales wane over the long term.
Back on investors’ radars
As of this writing, Suncor is up 41.8% year to date, notwithstanding the $609 million net loss in Q3 2022. At $43 per share, the dividend yield is 4.84%. It seems the erstwhile Dividend Aristocrat has regained investors’ trust and confidence.
Because of the sustained operational improvements across the asset base and improved free funds flow, the board approved an 11% dividend hike versus the previous quarter. Suncor Energy is back on investors’ radars, and the oil sands king is among the volume leaders again at the start of this month.
