Suncor's stock to climb, if company follows activist path: analysts

·3 min read
Suncor Energy facility is seen in Sherwood Park, Alberta, Canada August 21, 2019. REUTERS/Candace Elliott
Suncor Energy facility is seen in Sherwood Park, Alberta, Canada August 21, 2019. REUTERS/Candace Elliott

Suncor Energy's (SU.TO)(SU) management has "a lot of common ground" with the American activist investor pushing for changes at the Canadian energy giant. That's according to analysts who say the situation could ultimately lift the company's lagging stock.

Florida-based Elliott Investment Management published an open letter to Suncor's board on Thursday. In it, Elliott partner John Pike and portfolio manager Mike Tomkins describe a "slow-moving, overly bureaucratic corporate culture that appears to have lost the dynamism that not long ago made Suncor the most valuable energy company in Canada."

Elliott, which owns a 3.4 per cent economic stake in Suncor, is looking to add five new directors to the company's board. Its restructuring plan calls for the Calgary-based integrated energy firm to review the sale of its retail network of gas stations, improve its safety record, and increase shareholder returns, among its recommendations.

In a statement on Thursday, Suncor said it "appreciates the views of its shareholders and will take the time to carefully assess the recommendations and materials provided, with a view to enhancing shareholder and other stakeholder value."

"Suncor’s board and management team looks forward to engaging with Elliott in due course to better understand their perspective," the company added.

Elliott says its plan would raise the company's share price to $68.

Suncor's Toronto-listed stock fell less than one per cent to $47.07 per share as at 12:35 p.m. ET on Friday. According to Elliott, the stock has lagged its oilsands peers by an average of 91 per cent over the last three years.

"The company that was once the industry leader is now a 'show me' story to investors," Pike and Tomkins wrote in their letter.

Credit Suisse analyst Manav Gupta believes there's "a lot of common ground between Suncor management and [the] Elliott team to work together, especially as it relates to improving safety and reliability of operations."

In a note to clients, Gupta also expressed confidence that Suncor can close the performance gap between its stock and rivals in the U.S. and Canada, if the company follows the path laid out by Elliott.

George Huang of Raymond James says investor confidence in Suncor has been shaken over the last two years, owing in part to "operational missteps" and a dividend cut that has since been reversed.

"The letter from Elliott in our minds could serve as a catalyst for the stock beyond the move we saw in the equity today," he wrote in a research note on Friday, referring to the stock's more than 11 per cent gain on the news.

"The plan from Elliott underscores the value inherent in Suncor's asset base and the valuation dislocation brought on by a tumultuous past 24 months," he added. "If the market is now willing to give more consideration to a sum-of-the-parts approach in valuing Suncor shares as a result of today's events, we believe that this will have positive implications for Suncor's valuation in the near and medium term."

Gupta maintains an "outperform" rating on the stock, and a 12-month target price of $50. Huang also maintains an "outperform" rating and a $50 price target.

For years, Suncor's stock has been closely followed by Canadian institutional and retail investors. On Friday, Globe and Mail market strategist Scott Barlow noted Suncor is the only Canadian company on a list of "highest conviction stock picks" from North American equity analysts at Morgan Stanley.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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