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At Suncor (NYSE: SU ) , Canada's largest energy company, bland has replaced bold. In just over a year after taking over as the company's Chief Executive, Steve Williams has slashed production targets, cancelled mega projects, and doubled the dividend. In his own words, Williams has abandoned the idea of "growth for the sake of growth". But what should shareholders think of the company's new philosophy?
Suncor's new direction
After taking the helm, Williams told analysts during his first conference call, "Growth for the sake of growth doesn't interest me. What interests me is profitable growth". The comment signaled that Suncor was distancing itself from the wild spending days of its past. Within a year, the new Chief Executive abandoned his predecessor's production target of one million oil equivalent barrels per day by 2020, shelved the company's $11.6 billion Voyageur upgrading facility, and sold off $1 billion in North American natural gas assets.
In Williams' view, a project only warrants investment if it can exceed a 15% return hurdle rate. Such a policy favors, not bold new mining projects, but smaller initiatives.
The benefit of these types of projects is that they provide a high return on investment with lower risk and capital intensity. As part of this effort, Williams is investing to improve the reliability of the company's upgrader facilities and is aiming to add an extra 100,000 barrels of production over the next three to four years through de-bottlenecking-industry slang for wringing the kinks out of existing operations.
All of this means the company's existing operations are spinning off a lot more cash than management can reinvest profitability. Much of this excess capital has been returned to shareholders. Since 2012, Williams has doubled Suncor's quarterly dividend payout to $0.20 per share and has pledged to buy back 10% of the company's outstanding shares.
What should shareholders think of this?
Investors shouldn't be biased by either higher dividends or faster growth. Rather they should be concerned with how effectively management is allocating capital.
If management can generate a low-risk 20% return, I'd rather the company keep my money. Take Harold Hamm, Chief Executive at Continental Resources (NYSE: CLR ) for example. Mr. Hamm is drilling with a straw in the Bakken with the company posting a 22% annual return on equity over the past five years. After generating those types of numbers, I don't resent Mr. Hamm for not paying shareholders a dividend at all. He's doing a better job deploying his capital than most investors could.
But that's not the case at Suncor. Ploughing money back into the oil sands is probably less than optimal. Costs continue to rise due to chronic labor shortages. Bitumen prices are weak because of insufficient pipeline capacity. As I discussed above, Mr. Williams has a few projects on his plate where he can generate a sufficient return for shareholders. But he's probably going to struggle to find a productive use for all of the $4.8 billion the company is expected to generate in free cash flow this year.
So rather than redeploy that capital in low-return projects for the sake of earnings growth, Williams is returning it to shareholders. That's a break from the company's old philosophy and something shareholders should be happy with.
But Suncor isn't the only company with a new chief executive dropping the growth for growth's sake mantra. Due to low commodity prices, several other names in the energy patch are adopting similar changes.
Chesapeake Energy's (NYSE: CHK ) new Chief Executive Doug Lawler is looking to sell off non-core assets, increase liquids production, and cut costs. The move is a big change from the company's days under Aubrey McClendon when the company took on $12 billion debt to finance massive land grab.
Under the leadership of former Chief Executive Tom Ward, SandRidge Energy (NYSE: SD ) was criticized for its reckless spending that created unnecessary risks for shareholders. But since new CEO James Bennett took over, the company has slashed capital expenditures, and refocused drilling de-risked Mississippi Lime properties. It's a refreshing change for investors.
Foolish bottom line
Mr. Williams faces a big decision later this year when the company will make a final judgement on whether to proceed with the Fort Hills bitumen mining project. Suncor has delayed the decision as it tries to determine if the project will provide a sufficient return on investment. I don't know what the final decision will be, but I believe Williams' decision will be in the best interest of shareholders. A trustworthy management team is a hard trait to find and half the battle when searching for quality investments.
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