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Msg  78397 of 134033  at  7/2/2017 8:43:41 AM  by


Oil Company Wins Over Investors by Promising to Stop Looking for Oil

Dow Jones Institutional News; New York [New York]01 July 2017.

By Bradley Olson
CALGARY -- One of the best-performing oil companies in the past year is gaining favor with investors in part by embracing an unusual strategy: promising not to reinvest in its core business "in the foreseeable future."

The company is Suncor Energy Inc., Canada's largest oil producer, and the core business is the country's controversial oil sands. A host of big international oil companies have plotted a speedy retreat from the region because of concerns about how the once-booming area can remain lucrative in the face of regulation to limit carbon emissions and relatively cheap U.S. shale drilling.

Despite the cloud over the oil sands, Suncor shares outperformed every major North American oil company from June 2016 to May, as well as the S&P 500 index. Most other energy producers have been routed as crude prices have fallen by almost 20% since April.

Suncor has gained favor in part by heeding the chill on investment. After years of spending to ramp up new projects, the company is about to take a pause in the oil sands, where operators must use steam or expensive equipment to transform the tar-like crude into a substance suitable for refining.

Instead, Suncor plans to give investors much of the excess cash it will generate in the coming years. From this year to 2020, Suncor may generate $15 billion in free cash flow, according to Goldman Sachs.

"We've decided to let the shareholders see the cash," Chief Executive Steve Williams said in an interview. "We can continue this model for a lot longer."

Suncor's run, which has slowed in the past month as crude prices fell, is a testament to changing investor appetites for oil companies. A decade ago, a promise not to invest in a company's core business "in the foreseeable future," as Mr. Williams assured investors in February, might engender a lack of confidence.

But in a world where uncertainty looms due to questions about price swings, demand, new technology and climate regulations, a pledge to give cash to shareholders rather than spend it has been welcomed.

Suncor is a top pick among energy analysts at Goldman Sachs Group Inc. and is recommended as a "buy" by 81% of analysts, more than any other big oil producer. Including reinvested dividends, the company's U.S. shares returned 18% to shareholders from June of last year to May 31. That's better than every other major North American oil company in that time.

Mr. Williams hasn't sworn off the oil sands forever, only investments in new, company-built projects. Acquisitions remain a possibility if valuable assets are available on the cheap. Rather, he has assured shareholders that Suncor can continue to grow, generate cash and buy back shares even at low oil prices.

Investor enthusiasm hasn't spilled over to many other oil sands companies. Cenovus Energy Inc., a smaller Suncor rival, has fallen almost 50% since announcing a $13 billion deal in March to expand its oil sands output. The company said last month that it would replace its CEO as investors soured on the deal.

Royal Dutch Shell PLC, Statoil ASA, Marathon Oil Corp. and ConocoPhillips have disposed of Canadian assets in the past year, and analysts expect others to follow.

Production in Alberta's oil sands tends to be more expensive and carbon intensive due to the added energy needed to make the heavy oil flow. The higher emissions stemming from such techniques have made Canadian crude a target of environmental activists.

The big oil exodus from Canada has come as low prices force companies to favor operations that turn a profit quickly and require less upfront investment. Being a low-cost producer will be an advantage if oil demand falls and prices remain depressed for years.

Although shale production is usually seen as the lowest-cost opportunity available to most big oil companies, Suncor also has seen the cost of its operations fall.

The cash cost of Suncor's oil sands operations has declined by 30% to 40% since 2009 and reached $17 a barrel in April, according to Wolfe Research. That is competitive with some of the lowest-cost production in the U.S.

Mr. Williams says Suncor will be able to cut costs further in ways that will also reduce emissions. The company is testing autonomously driven mining trucks in certain operations. Suncor and others also have begun using solvents instead of steam -- requiring less energy and lower emissions -- to make the tar-like oil easier to extract, process and ship.

"Hydrocarbons have a fundamental part to play in the energy mix forever, " says Mr. Williams. "Technologically, we can solve most of the issues."

Some of the company's oil sands operations will soon have carbon emissions that are comparable to other kinds of extraction, he says. While regulatory concerns may intensify, for now restrictions in even the most stringent areas equate to a price of just $1 a barrel, he says, suggesting that concerns about such costs are overblown.

Some investors remain wary of making a big bet on the oil sands due to coming regulations. They see the industry's future as similar to energy utilities that generally don't see massive growth but are popular with shareholders for returning cash.

"Growth will be very difficult," given potential caps on carbon emissions and the flight of capital to other areas, said Rafi Tahmazian, senior portfolio manager at Canoe Financial Corp., a Calgary-based investment fund with about $700 million in energy investments. "The future of the oil sands is to forget about growth, manage assets well and become a yield play."

Write to Bradley Olson at Bradley.Olson@wsj.com

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78398 Re: Oil Company Wins Over Investors by Promising to Stop Looking for Oil ARB 10 7/2/2017 10:29:42 AM

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