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Suncor, Algonquin Power cut from RBC top energy picks

Suncor Energy and Algonquin Power & Utilities face unique challenges heading into 2023.   REUTERS/Mark Blinch
Suncor Energy and Algonquin Power & Utilities face unique challenges heading into 2023, says RBC Capital Markets. REUTERS/Mark Blinch

Suncor Energy (SU.TO)(SU) and Algonquin Power & Utilities (AQN.TO)(AQN) have been cut from RBC Capital Markets’ global energy best ideas list as the Canadian companies face internal challenges.

In a report to clients on Wednesday, RBC analysts say “hard work lies ahead” for Suncor after the Calgary-based oil company spelled out a plan to improve its troubled Fort Hills mine in northern Alberta at a recent investor day. The 36-month turnaround effort is likely to mean higher costs and lower production in the interim for the integrated energy producer.

At the same time, Suncor is striving to improve a tarnished safety record, find a full-time CEO, and boost profit at its Petro-Canada chain, following an agreement with an activist investor in July.

While ousted from the RBC’s best energy ideas list due to its full plate of challenges, bank analyst Greg Pardy recently reiterated his “outperform rating” on the stock. He also gave a nod to Suncor’s interim boss.

“We could see Kris Smith becoming Suncor’s permanent CEO, and would support that appointment,” Pardy wrote on Nov. 29.

Oakville, Ont.-based Algonquin was the other Canadian stock to lose its spot on RBC’s list. Others removed include oil giants BP (BP) and ConocoPhillips (COP), and smaller Texas-based producer Ranger Oil (ROCC). Among the additions are Diamondback Energy (FANG), Marathon Petroleum (MPC), Permian Resources Corporation (PR), Repsol SA (REPYY), and Superior Plus (SPB.TO).

Algonquin shares have plunged about 35 per cent since Nov. 11, when the renewable utility company cut its 2023 guidance, citing risks from higher interest rates and inflation.

Chief executive Arun Banskota attempted to reassure investors in a Nov. 17 letter to shareholders in which he disclosed a personal purchase of 131,000 common shares days earlier.

RBC analyst Nelson Ng warns Algonquin will need to cut back on capital spending due to “poorly managed exposure to floating interest rates.”

Like many utilities, Algonquin’s dividend has been a big part of its allure to investors. Ng questions how long the company’s payout can be sustained.

“We believe the company will also need to cut its dividend (payout ratio will exceed 100 per cent in 2022 and 2023), and the credit rating could be at risk for a downgrade if the company doesn’t take steps to strengthen its balance sheet,” he wrote.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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