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Suncor returns some gravy to shareholders, but is it enough?

In the oil patch, they call it the execution phase.

It has nothing to do with capital punishment, but rather it's the period after a company finishes its exploration, and buys all the assets it needs or gets its oil sands projects up and running. It's the time when investors expect to get paid after years of expensive build-up.

It's also boring.

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Suncor Energy Inc. is in the execution phase.

CEO Steve Williams served notice this week that Suncor will spend the bulk of its efforts trying to wring cash out of oil sands and refining operations by cutting costs and devising ways to run more product through the equipment, a process called debottlenecking.

As it does that, Canada's largest energy company will return some gravy to shareholders in the form of dividends and share buybacks. On Tuesday, it boosted its quarterly payout by 15 per cent and reset its share buy-back program at up to $1-billion.

It follows a year in which the company retrenched, chopping capital spending, scrapping its planned Voyageur oil sands upgrader and jettisoning conventional natural gas properties. It did decide after several years of study to move forward with one big oil sands project – Fort Hills, a joint venture with France's Total SA.

It's not the thrill-a-minute stuff Canada's oil industry was famous for – big deals trumpeted by tough-talking oil men who weren't afraid to ruffle feathers. But it's what investors demand from a new breed of oil executive who's more wary of public opinion as the costs of development surge, crude prices remain volatile and the debate over building new pipelines refuses to subside.

"It goes back to the cycle of 2005 through 2008, when cost escalation just went out of control on the oil sands side. The companies' memories are pretty good with respect to that," said Canaccord Genuity analyst Phil Skolnick. "They can't layer on major project after major project like they thought they could in the last cycle, so what else can they do? Either acquire, or do more managed build-out of projects and return a portion of cash as well to shareholders."

Even so, reviews are mixed. Suncor shares are up 4.6 per cent in the past six months, on par with the TSX capped energy index. Since the start of the year, though, Suncor has underperformed the group, dropping 5.5 per cent of its value versus 1.5 per cent for the group.

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This is not your father's Suncor, or even your older brother's. The company spent more than a decade half plowing billions of dollars into project expansions, sometimes blowing its budgets as the industry's appetite for growth exceeded Alberta's ability to feed it with labour and materials. All the while, it tapped debt markets to fund expansion.

When the financial crisis took hold in late 2008, Suncor was forced to put construction on hold. A few months later, former CEO Rick George took the opportunity to bolster cash flow by launching the takeover of Petro-Canada, the largest-ever Canadian oil deal.

The more low-key Mr. Williams took the helm in mid-2012 and changed the narrative. He backed away from a corporate expansion plan targeting a nearly doubling of output to a million barrels a day by the end of the decade, opting to make "operational excellence" job one.

For all of his focus on capital discipline – the watchwords of today's oil business – Mr. Williams took a bit of flak following the release of fourth-quarter results this week.

Mr. Skolnick pulled the company off his Canadian focus list of stocks on what he termed "reduced appeal." He cited a lower-than-expected dividend hike and the fact that Suncor has the smallest exposure among oil sands producers to an improving market for heavy crude.

It's not all bad for Suncor by Mr. Skolnick's estimation. In fact, he maintained a "buy" rating. He projects surging amounts of free cash flowing from operations this year and next, and believes the share price is a bargain compared with rivals.

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However, Suncor puzzled the market this week by ending its practice of publishing its oil sands production numbers monthly, data that equity investors and oil traders alike have become accustomed to. During an execution phase, it's difficult to see the logic behind reducing transparency for one of the company's main indicators of execution.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in energy, finance and environment for The Globe and Mail’s Report on Business, based in Calgary. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general  topics. More


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