Suncor could see partners 'come out of left field' for Petro-Canada station upgrades

A Bay Street money manager says Suncor Energy will have no problem finding partners to enhance Petro-Canada gas stations with more food, shopping, and green travel options. (Photo by Artur Widak/NurPhoto via Getty Images)
A Bay Street money manager says Suncor Energy will have no problem finding partners to enhance Petro-Canada gas stations with more food, shopping, and green travel options. (Photo by Artur Widak/NurPhoto via Getty Images)

Suncor Energy (SU.TO)(SU) will be spoiled for choice as it courts strategic partners to add more quick-service food, convenience shopping, and green offerings to its Petro-Canada retail division. That's the view of an institutional shareholder who is among those praising the rejection of a potential sale of the 1,600-location gas station chain.

Calgary-based Suncor said Tuesday its board unanimously opted to retain the business. The decision follows a four-month review required by an agreement with Elliott Investment Management struck in July.

The American activist hedge fund went public with a campaign for changes at the integrated oil company late April, blasting Suncor's safety record on the heels of worker deaths, and lagging financial performance versus rivals. At the time, Elliott, which disclosed a 3.4 per cent stake in Suncor, pegged a sale price for Petro-Canada at between $4.7 billion and $9 billion. The firm suggested selling the business as an option to boost shareholder value.

Suncor executives rejected the idea from the start, arguing the gas station chain known for its maple leaf banner is an important link in the company's extraction-to-gas tank value chain.

On Tuesday, Kris Smith, Suncor's interim chief executive officer, said the company engaged 17 potential buyers, two-thirds of whom passed, with the remaining players unwilling or unable to purchase the entire network, or pay in cash. The company says the decision to retain Petro-Canada was unanimous from its board, which has included three independent directors installed by Elliott since July.

Now, Suncor aims to raise the retail network's profits by 40 per cent by 2027, at an incremental cost of $100 million per year for the next five years. Smith's plan envisions closing underperforming locations, while enhancing others with food, shopping, and "energy transition offerings" in a bid to shield Suncor from lower fossil fuel sales in the future.

"We expect gasoline demand could decline by up to 25 per cent by the mid-to-late 2030s based on current government regulation, and forecast EV penetration," Smith told an audience at Suncor's annual investor day in Toronto on Tuesday. "Without the control demand channel of our retail business, or a strong long-term supply agreement that replicated it, Suncor would feel the full impact of marketwide demand decline over time."

Smith says new partnerships will be key to the plan, noting Suncor's current agreements with A&W Restaurants (AW-UN.TO) and Royal Bank of Canada (RY.TO) through its retail division.

Greg Taylor, chief investment officer at Toronto-based Purpose Investments, sees Suncor having no trouble finding new partners. He expects many will be anxious to place their food and retail offerings next to Petro-Canada's growing EV charging network, where drivers are certain to have idle time.

"There are going to be a lot of players that could come out of left field to try and get involved with Suncor's optimization efforts," Taylor said in a phone interview.

"I'm sure there are lots of partners that would love to work with them to create different options, and even fund most of that build. I think it could be expensive, but there can be ways where you can make these sites a lot more profitable, and they don't put too much cash into it."

Taylor describes Petro-Canada as one of the better assets Suncor has at the moment, favouring the call to keep the business in-house rather than selling or spinning it off to satisfy the near-term demands of an activist investor. Purpose holds Suncor shares in some of its funds.

Raymond James analyst Michael Shaw says Suncor's decision is no surprise, given the extent to which the company has stressed its strategic value and stable cash flows.

"We think the conclusion to hold onto the business unit is the right decision," he wrote in a note to clients on Thursday.

Michael Sprung, president of Sprung Investment Management and a Suncor shareholder for clients, predicts Elliott isn't done putting pressure on the company. The hedge fund did not return a request for comment.

"I think Elliott's time horizon is a little shorter than management's," Sprung said in a phone interview with Yahoo Finance Canada, describing the firm's saga with Suncor as a "longer workout" than most activists are used to.

"There is still going to be a bit of a disjoint between management and parts of the board that have different objectives," he said.

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

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