Clean energy advocates would probably be happiest if the world could remove carbon fuels from the energy landscape overnight. That's just not possible, and the transition away from fuels like oil and natural gas is likely to take decades, which means oil producers like Suncor Energy (SU 0.87%) will still be able to produce reliable cash flows for years to come. But how they use that cash will be an increasingly important topic for investors to monitor. Suncor, for one, is starting to pare down its bets.
Not a simple business
Suncor operates what amounts to oil mines. Simplifying things greatly, it digs up oil-rich earth and then processes it to squeeze out the oil. Oil sands assets are expensive to build, but once they are up and running, they tend to have long production lives and fairly low operating costs. On top of this business, Suncor has layered a chemicals and refining operation, which under normal circumstances helps to even out top-level performance. It is a fairly reliable and stable company, when you consider that it operates in a business prone to volatile, commodity-driven price swings.
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Like other companies in the energy sector, however, Suncor can see the writing on the wall. Clean energy is going to continue to grow in importance as the world looks to shift away from carbon fuels. So while an "all of the above" approach is still being taken, it has started to invest outside of its oil business. That's a logical approach that began in 2002 when Suncor partnered with Enbridge on an early renewable power project. It has since built eight wind farms. In addition to that investment, the company also has been working on carbon capture and storage, renewable fuels, and hydrogen, among other things.
Shifting gears
In early April, however, Suncor announced that it was selling its solar and wind assets. This is in keeping with a broader business simplification plan that involves selling some oil assets. The goal is to focus on what Suncor does best as opposed to trying to do too many things at one time. It intends to key in on renewable fuels and hydrogen in the "clean energy" space, as both share some similarities to the oil business.
On the surface this move sounds like a solid plan. No investor wants a company that is pulled in so many directions that it can't really focus on anything. And by focusing on just a few areas, Suncor can put more cash behind the investments it does choose to make. Thus, it can get bigger faster in the key niches where it wants to lead.
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Key Data Points
This is not the same approach being taken by companies like TotalEnergies, BP, and Shell. These companies, admittedly much larger entities, are spreading their bets a lot more liberally and are in fact highlighting solar and wind as key growth opportunities. This more scattershot approach has the benefit of allowing the integrated giants to put their fingers in so many pies that something is likely to work out in the long term. Suncor's approach, perhaps necessitated by its more diminutive size, requires management to pick the winning technologies -- a much riskier proposition.
While Suncor still has a solid energy business and plenty of time to pivot if slimming down doesn't work out as planned, it could end up losing valuable time. Moreover, there's no reason why it couldn't leave the heavy lifting to others, simply opting to provide cash for minority stakes in wind and solar projects.
To be fair, U.S. energy giants Chevron and ExxonMobil are both taking a similar approach, choosing complimentary clean energy investments over things like big solar and wind farm developments. So it is hard to say that Suncor is making a massive mistake. However, for investors who err on the side of safety and diversification, Suncor's business shift probably deserves some deep thought.
A more focused bet
When it comes to the energy sector, investors increasingly have to think about the environment today and the environment of tomorrow. Although carbon fuels will remain important for years to come, it is totally reasonable to start thinking about the transition now. For investors unsure of what technology is going to be the "oil killer," European names like TotalEnergies, BP, and Shell will probably be a better feeding ground. That said, if you believe the transition is likely to be gradual and include fuels similar to oil and natural gas, then Exxon, Chevron, and now Suncor would be reasonable alternatives. The problem here is that the $50-billion-market-cap Suncor doesn't have the same resources as $300-billion-plus-market-cap giants like Exxon or Chevron to rapidly shift gears if things don't go as planned.
