Owners of Petro-Canada will receive 1.28 shares in the new company for each of their shares while Suncor holders will get one share for each held, the Calgary-based companies said today in a statement. The combination will create Canada’s largest energy company and is priced approximately 25 percent above Petro-Canada’s 30-day weighted-average trading level.
Today’s deal is the second-biggest in the oil and gas industry since January 2007, according to Bloomberg data. It will help Suncor cut reliance on high-cost projects in northern Alberta, which involve extracting oil-soaked sand with mechanical shovels and processing bitumen into synthetic crude, after oil prices fell more than $100 from a record.
‘It’s a good opportunity for Suncor to snap up some good assets at fairly depressed prices,” said Greg Smith, managing director of London-based investment adviser Fat Prophets U.K. Ltd. “Oil sands are the legitimate solution to the long-term energy problem but it’s a lot more costly to get the oil out of the ground.”
Petro-Canada surged 18 percent to C$34.94 in German trading while Suncor shares slid 4.7 percent to C$29.44.
Quarterly Loss
Suncor reported the first quarterly loss in its history in January and slashed its capital budget after prices plunged and costs jumped. Canadian oil sands require oil prices of at least $60 to allow production, according to Saudi Arabia. Crude futures traded at $52.68 a barrel in New York today.
The Ontario Teachers’ Pension Plan increased its stake in Petro-Canada, Canada’s second-biggest refiner, to 3.3 percent in the fourth quarter and said it would push for ways to boost the share price after the stock lost half its value last year. The stock underperformed the Standard & Poor’s/Toronto Stock Exchange Composite Index five years in a row, a period when oil prices almost tripled.
Petro-Canada fell C$1.25 to C$29.65 on March 20 on the Toronto Stock Exchange, giving it a market value of C$14.37 billion. The stock has risen 11 percent this year. Suncor, which lost 56 percent of its market value last year, has jumped 30 percent this year, the most among Canadian oil companies valued at more than C$1 billion. The stock dropped C$2.50 on March 20, ending last week at C$30.90.
Advisers
CIBC World Markets and Morgan Stanley are advising Suncor while Petro-Canada is being advised by RBC Capital Markets and Deutsche Bank AG. The companies estimate annual operating expenditure cuts of C$300 million.
The new company will have a resource base of about 7.5 billion barrels of oil equivalent of proved and probable reserves, in addition to an estimated contingent resource base of approximately 19 billion barrels of oil equivalent.
Petro-Canada has international assets in the North Sea, Libya, Syria and offshore Trinidad and Tobago.
Suncor’s oil sands operations are based near Fort McMurray in northern Alberta, where it recovers bitumen and upgrades it to refinery-ready feedstock and diesel fuel.
Suncor explores for natural gas in western Alberta and northeastern British Columbia. It also operates two refineries, an 85,000 barrel-a-day facility in Sarnia, Ontario producing gasoline, kerosene, jet and diesel fuels and a 93,000 barrel-a- day plant in Commerce City, Colorado, producing gasoline, diesel fuel and paving-grade asphalt.
Environmental Opposition
Environmental groups have called on President Barack Obama to reject any bid by Canada to exempt tar-sands oil from proposed climate-protection rules in the U.S.
In the total “life-cycle” of the product, from separating oil from sand and clay all the way to filling a car’s tank with gasoline, 20 percent more greenhouse-gas emissions are released compared with pumping conventional crude from a well, the Rand Corp. research organization of Santa Monica, California, said in a 2008 report.
The deal is expected to close in the third quarter, the statement said. The merged company’s board of directors is expected to comprise 12 directors, including eight from Suncor’s current board and four from Petro-Canada’s board. Suncor Energy Chairman John Ferguson will serve as chairman of the new company.
On completion, Suncor’s existing shareholders will own about 60 percent of the new company and Petro-Canada shareholders about 40 percent.
Suncor is Canada’s third-biggest oil and gas producer by market value, while Petro-Canada ranks sixth.
Inflated Prices
As recently as Jan. 20, Suncor Chief Executive Officer Rick George said he wasn’t considering any major acquisitions because asset prices remained inflated. “I think there’re some people hanging on to the history of it rather than the go-forward basis,” George told investors and analysts on an earnings conference call.
Like Suncor, Petro-Canada posted a fourth-quarter loss amid falling prices, unfavorable currency fluctuations and project delays. Petro-Canada produced about 409,000 barrels of oil equivalent a day in the fourth quarter, 46 percent more than Suncor’s total, from its operations in Canada, the U.S., the North Sea and Africa.
Gasoline Stations
The company also operates a chain of gasoline stations in Canada.
Formerly owned by the government, Petro-Canada has investments in offshore fields near Newfoundland, including Hibernia and Terra Nova. It went public in 1991, and the government sold its remaining 19 percent stake in 2004.
A provision in Canadian law bars anyone from owning more than 20 percent of Petro-Canada’s stock, a legacy of the company’s former status as a Crown, or government-owned, corporation. The acquisition is subject to regulatory approval.
Syncrude Canada Ltd., a joint venture led by Canadian Oil Sands Trust of Calgary, is the biggest oil-sands producer. Imperial Oil Ltd., which is owned mostly by Exxon Mobil Corp., is Canada’s biggest refiner.
To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.
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