Suncor Energy (SU) is tied to Canada’s oil sands both financially and in the minds of most investors, and Canada’s oil sands are increasingly controversial as a source of high greenhouse gas emissions.
Suncor stock has been blacklisted by Norway’s wealth fund and Total (NYSE:TOT) has written off its investment in oil sands as “stranded” assets.
Total has reviewed its oil assets that can be qualified as “stranded”, meaning with reserves beyond 20 years and high production costs, whose overall reserves may therefore not be produced by 2050. The only projects identified in this category are the Canadian oil sands projects Fort Hills and Surmont. – Source: Total press release, July 29, 2020
As other articles on SeekingAlpha.com have pointed out, today Suncor is struggling with low oil prices and reduced production leading to expenditure reductions, a loss in quarterly earnings, and a reduction in the company’s dividend.
You can read those numbers elsewhere, but my focus is not on today’s story and financial numbers. I am interested in Suncor Energy’s future and the tools they have to achieve that future.
Autonomy – Suncor’s strategy scenario
Suncor has created some scenarios to guide its business strategy. The company’s best guess about the future is contained in its “Autonomy” scenario found in the company’s “Climate Risk and Resilience Report 2020.” It includes:
- Falling costs and improved reliability of clean energy allow developing countries to bypass large-scale hydrocarbon-based energy infrastructure.
- Natural gas is a transitional fuel for power generation, but after 2030, increasingly renewable power generation fuels a largely electrified energy system.
- Breakthrough battery technology development supports growth in electric vehicles.
- Oil’s role in geopolitics is substantially diminished contributing to a generally stable geopolitical environment. Stable moderately strong economy.
- Carbon-intensive industries face high regulatory costs and requirements.
- No new export pipelines are built out of the Athabasca oil sands region.
The energy system is transforming towards a low-carbon economy and we believe Suncor has an important role to play in that transition. Through new technology, investment in low carbon power and fuels, and increasing energy efficiency, we plan to reduce our greenhouse gas (GHG) emissions intensity by 30 percent by 2030. – Source: Suncor 2019 Annual Report
Reaching that low-carbon economy for Suncor means:
Wind Power – The company has over 100 MW of wind power operating at present, and although it has delayed implementation of its Forty Mile Wind Power Project, that project shows Suncor’s understanding that future electrification will be coming from renewable sources.
Biofuels – The St. Clair Ethanol Plant is Canada’s largest ethanol facility and represents Suncor’s ongoing commitment to biofuels.
Biofuels investment – Suncor has invested $15 million in LanzaJet, a new company that will produce sustainable aviation fuel (SAF). Funding will be used to build a demonstration plant that will produce 10 million gallons per year of SAF and renewable diesel starting from sustainable ethanol sources. Production is expected to start in early 2022. This initial investment coupled with participation from All Nippon Airways (ANA) will complement the existing $14 million grant from the US Department of Energy, enabling the construction of an integrated biorefinery at LanzaTech’s Freedom Pines site in Soperton, Georgia.
EV charging – Suncor offers Canada’s first coast-to-coast fast charge network and boasts that it has a charger every 250 km or less from Halifax, N.S., to Victoria, B.C.
Getting from here to there
Reaching that energy future will mean a continuing commitment to invest even when economic conditions are difficult, as they are now.
Suncor may need to eventually abandon some of its current assets and invest in new and unproven technologies, such as sustainable aviation fuel.
There are a number of clean energy companies vying for this space, but some of them are start-ups with a limited track record and others by necessity are carrying a heavy debt load to finance their projects.
In this situation, Suncor has an advantage of both liquidity and its current relatively light debt load.
Source: Suncor Q2 2020 Earnings Presentation
Transitioning to new forms of energy will be difficult and messy, but Suncor has an infrastructure that puts it in position to benefit from those investments.
One of my metrics in measuring the company’s progress will be how they balance current needs with future opportunities.
Their delay of the Forty Mile Wind Power project is not a good sign, but their willingness to invest, even if it means cutting the current dividend, I find encouraging.
Energy stocks are out of favor right now. Even the pending storms in the Gulf of Mexico are bringing little relief to energy investors. Raymond James called Exxon Mobil’s (NYSE:XOM) removal from the Dow Jones Industrial Average a “sign of the times.”
But energy is still needed, even if it will be provided by renewables and electrification, and who knows, maybe by green hydrogen.
An investment in Suncor Energy is a bet that the company will successfully and profitably transition to new types of energy as it is already proving in its commitment to wind power, biofuels, EV charging, and other investments.
Disclosure: I am/we are long SU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.