Focus: Canada's cash-rich oil sands firms face pressure to spend on transition
01/04/2021 11:00
By Rod Nickel, Nichola Saminather and Nia Williams
April 1 (Reuters) - Canada's biggest oil sands producers are
generating billions more in free cash flow in a
faster-than-expected pandemic rebound, but taking a cautious
approach to spending it that is disappointing environment-minded
investors.
Their strategy to repay debts and pay shareholders has won
praise from investors in Canadian Natural Resources CNQ.TO ,
Suncor Energy SU.TO and Cenovus Energy CVE.TO who are eager
for higher returns. But greener shareholders warn they could
divest or oppose management.
The sharp recovery has thrust the companies deep into a
debate on returns versus cleaner fuels that will determine the
makeup of their business for decades. The oil and gas sector
accounted for 26% of Canada's carbon emissions in 2018, and
Prime Minister Justin Trudeau has set a goal of net-zero
emissions for the country by 2050.
Canadian Natural expects to generate up to C$5.4 billion
($4.30 billion) in free cash flow in 2021, from C$692 million
last year. Suncor projects additional cash flow of C$400 million
this year and C$1 billion by 2023. Cenovus could generate C$3.5
billion this year, analysts at investment bank Morgan Stanley
estimate, from a loss last year.
CHANGE IS COMING
Some investors and lenders warn they could walk away if more
of that cash is not spent on projects that transition the
companies for a low-carbon future.
"They have these ambitious transition targets and a
relatively short window to make people believe that their
transition plans are real," said Jamie Bonham, director of
corporate engagement at NEI Investments, which owns shares in
all three oil sands producers worth a combined C$71 million. NEI
could divest or vote against directors if progress does not come
soon, he said.
"We will take into account whether they're moving in the
right direction," said Steve Peacher, president of SLC
Management, an investment subsidiary of Sun Life Financial
SLF.TO . "We won't lend to energy firms that we don't think are
doing that."
Canada's biggest energy producers trade at a free cash flow
yield of 15% for 2021 and 2022, compared with a median of 10%
for U.S. peers, Morgan Stanley said in March.
However, oil executives argue it is too soon to take a more
aggressive approach, with the pandemic continuing.
"We're focused on our balance sheet," Canadian Natural
President Tim McKay said, adding that repaying debt is a
priority.
Suncor said in February it is spending additional cash on
repaying debt and repurchasing shares, with 10% of its capital
earmarked for a wind farm and cogeneration project.
"If you're structurally cutting shareholder returns to take
their cash and invest it in the transition, that's going to be
tough, because we need the support of the shareholders and the
capital markets," Suncor Chief Executive Mark Little said.
Cenovus has said it plans to reduce debt this year and did
not comment further on spending plans.
'CARROTS NOT STICKS'
While oil sands companies are being cautious with cash,
Alberta has asked Ottawa to fund a C$30-billion, 10-year program
to develop carbon capture.
The federal government will require the companies to share
the costs of any carbon-capture initiatives, said a senior
government source who was not authorized to speak publicly.
One investor, Michael Sprung, said repaying debt and
increasing dividends are the right corporate priorities. "I
think oil is going to be the primary part of their business," he
said.
But lenders are growing cautious about the sector.
"We're trying to use carrots, not sticks," in pushing fossil
fuels companies to produce more renewable energy, said Andrea
Barrack, global head of sustainability at Canada's
second-largest lender Toronto-Dominion Bank.
If they fail to accelerate the shift to cleaner fuels,
lenders will see them as risky over time and require higher
interest rates, said Amy West, TD Securities' global head of
sustainable finance.
Bank of Montreal also aims to reach net zero emissions in
its lending portfolio by 2050, but without "disruptive change"
to Canada's economy, Chief Executive Darryl White said.
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The oil sands companies finally have the cash to put toward
greater emissions reductions, said Andrew Logan, senior director
of oil and gas at Ceres, a shareholder advisory group.
"There's a big gap between rhetoric and investment," Logan
said. "They've been 20 years away for the last 20 years."
($1 = 1.2563 Canadian dollars)
(Reporting by Rod Nickel in Winnipeg, Nichola Saminather in
Toronto, Nia Williams in Calgary; additional reporting by Steve
Scherer in Ottawa)
((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs;
1-204-230-6043;))