For most investors, management quality is perhaps the most overlooked aspect of evaluating a new investment prospect. It is easy to focus on a company’s fundamentals and valuation, and forget one simple fact—that behind a company’s fundamentals are managers and their decisions can create or destroy immense value.
This is the reason Warren Buffett cites a quality CEO as one of the major four factors he looks for when evaluating a company. Buffett states, “Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.”
Having said that, what factors should be considered when evaluating the quality of a CEO? According to Buffett, a first-class CEO should be—above all—a disciplined allocator of shareholder capital focused on creating long-term shareholder value through investing in the lowest-cost, most profitable growth prospects, while maximizing value from current operations at every turn.
Williams’s three-pillar strategy reflects principles of good management
Shortly after becoming CEO, Williams unveiled a crystal-clear vision for Suncor, which gave shareholders confidence regarding Suncor’s path going forward, and clearly differentiated Williams from Suncor’s previous CEO, Rick George.
Williams’s new strategy focused on three pillars—operational excellence, capital discipline, and profitable growth. Combined, these pillars work together to maximize shareholder value.
Williams is creating value by making current operations more efficient
The results of this strategy have been overwhelmingly successful, and have established Suncor as a premier energy company. With regards to the operational efficiency pillar, Williams is focused on creating value at a very low cost by increasing utilization rates and decreasing costs. This approach has worked and Suncor has seen its cash operating costs per barrel drop from nearly $40 in 2011 to $33.80 per barrel in 2014. In addition, refinery utilization rates were at 95% in 2014.
Williams further demonstrated focus on operational excellence by not only reducing capital expenses in response to the recent price downturn, but also by making a commitment to reduce operating expenditures by $600 million to $800 million over two years. These improvements have lead to Suncor possessing the highest netbacks in the industry, and position it well to withstand the oil price downturn.
Williams has adopted rigorous standards for capital discipline
How a manager allocates capital is critical and Williams has decided to focus his efforts on ensuring capital is allocated only towards the highest-return, lowest-cost projects, with any unused capital being returned to shareholders in the form of dividend increases and share buybacks. In fact, Williams won’t even allocate capital to a major new project unless it can meet his threshold of at least 15% return on capital employed.
For Williams, this has meant focusing on low-cost debottlenecking initiatives, which could provide over 100,000 barrels per day of extremely low-cost production, while improving reliability of operations. This focus on capital discipline has resulted in Suncor having both the strongest free cash flow in the industry, as well as the strongest balance sheet, with an impressive $5.5 billion of cash and low debt.
Suncor’s excess cash has been used to opportunistically buy back shares and increase its dividend, and over 10% of the float has been repurchased since 2011. In 2014 alone, Suncor allocated $3.2 billion to dividends and share repurchases.
Williams has focused on profitable growth—not growth for growth’s sake
Shortly after becoming CEO, Williams made two critical moves. He quickly stepped back from CEO Rick George’s ambitious goal of 1 million barrels per day of production by 2020, and cancelled the expensive Voyageur upgrader project.
Williams stated that growth for growth’s sake is of little interest to him, and his focus is instead on profitable growth. These were both smart moves. Although the Voyageur upgrader project made sense in 2010 when it was announced, its economics changed due to the boom in light crude production.
Cancelling a project that comprised a large portion of Suncor’s future growth was unpopular with shareholders at first, but it demonstrated Williams’s focus on building long-term value ahead of what is better for share price in the short-term, and ensuring that shareholder capital is only being deployed towards the most profitable available projects.