Canada’s biggest oil sands producers are generating billions more in free cash flow thanks to a faster-than-expected pandemic rebound, but their cautious approach to spending it is disappointing environment-minded investors. Their strategy to repay debts and pay shareholders has won praise from investors in Canadian Natural Resources, Suncor Energy, and Cenovus Energy 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 Resources 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 an 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. “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.
Related: U.S. Gasoline Demand Climbs Above 2020 Levels 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.
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.”
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