Is Suncor on the wrong track with its latest bold move?
VSLean energy advocates would probably be happier if the world could eliminate carbon fuels from the energy landscape overnight. It’s just not possible, and the transition to fuels like oil and natural gas will likely take decades, which means oil producers like Suncor Energy (NYSE:SU) will still be able to produce reliable cash flow for years to come. But how they use that money will be an increasingly important topic for investors to watch. Suncor, for its part, is starting to cut its bets.
Not a simple affair
Suncor operates what amounts to oil mines. Simplifying things greatly, he digs up the oil-rich earth and then processes it to extract the oil. Oil sands assets are expensive to build, but once operational they tend to have long lives and fairly low operating costs. On top of this business, Suncor has layered a chemical and refining operation which, under normal circumstances, helps to even out high-level performance. It is quite a reliable and stable company, considering that it operates in an industry prone to volatile, commodity-driven price fluctuations.
Like other companies in energy sectorhowever, Suncor can see the writing on the wall. Clean energy will continue to grow in importance as the world seeks to move away from carbon fuels. So, while an “all of the above” approach is still underway, it has begun to invest outside of its oil business. It’s a logical approach that began in 2002 when Suncor partnered with Enbridge on a first renewable energy project. It has since built eight wind farms. In addition to this investment, the company has also worked on carbon capture and storage, renewable fuels and hydrogen, among others.
In early April, however, Suncor announced it was selling its solar and wind assets. This is part of a broader business simplification plan that involves the sale of some oil assets. The goal is to focus on what Suncor does best rather than trying to do too many things at once. He intends to focus on renewable fuels and hydrogen in the “clean energy” space, as the two share some similarities with the oil sector.
At first glance, this move looks like a solid plane. No investor wants a company that is pulled in so many directions that it can’t really focus on anything. And by focusing on just a few areas, Suncor can put more money into the investments it chooses to make. So he can grow bigger faster in the key niches where he wants to lead.
It’s not the same approach taken by companies like TotalEnergies, PBand Shell. These companies, admittedly much larger entities, are spreading their bets much more liberally and in fact highlighting solar and wind as key growth opportunities. This more dispersed approach has the advantage of allowing the integrated giants to stick their fingers in so many pies that something is likely to work in the long run. Suncor’s approach, perhaps necessitated by its small size, forces management to choose winning technologies, a much riskier proposition.
While Suncor still has a strong energy business and plenty of time to pivot if weight loss doesn’t go as planned, it could end up wasting valuable time. Plus, there’s no reason he can’t leave the heavy lifting to others, simply choosing to provide cash for minority stakes in wind and solar projects.
To be fair, the American energy giants Chevron and ExxonMobil both take a similar approach, choosing complementary clean energy investments rather than projects such as large solar and wind farm developments. So it’s hard to say that Suncor is making a big mistake. However, for investors who value security and diversificationSuncor’s change of business probably merits careful consideration.
A more targeted bet
When it comes to the energy sector, investors increasingly need to think about the environment of today and the environment of tomorrow. Although carbon fuels will remain important for years to come, it makes perfect sense to start thinking about the transition now. For investors who don’t know which technology is going to be the “oil killer”, European names like TotalEnergies, BP and Shell will probably be a better breeding ground. That said, if you think the transition is likely to be gradual and include fuels similar to oil and natural gas, then Exxon, Chevron and now Suncor would be reasonable alternatives. The problem here is that the $50 billionmarket capitalization Suncor doesn’t have the resources of the $300 billion+ market cap giants like Exxon or Chevron to quickly shift gears if things don’t go as planned.
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