The pending merger of two Canadian oil sands giants, Suncor Energy and Petro-Canada, looks to go into the books as one of the smartest deals so far this year.
“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” said Rick George, who is president and CEO of Suncor and who will assume the same role with the merged entity. “The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada’s east coast and internationally.”
The two companies were pioneers in the mining and recovery of bitumen from the oil sands. Suncor brought the first commercial oil sands development on-stream in 1967. Petro-Can has a 12% stake in the Syncrude project that began production in 1978 and a 60% interest in the Fort Hills project, poised to become the next large producer in the near future.
The merged company will have an asset portfolio that includes a number of oil sands growth options for both mined and in situ recovery as well upgrading facilities. It will share in all the major oil development projects on Canada’s east coast. Internationally, it has low-cost production in the North Sea, North Africa and Latin America. The combined company will have a current crude oil and natural gas production rate of 680,000 barrels of oil equivalent (boe) per day, of which it has refining capacity for 433,000 b/d. Beyond hydrocarbons, the new entity also has a platform of renewable energy projects. It’s resource base will be 7.5 billion boe of proved and probable reserves, plus an contingent resource base of 19.0 billion boe.
Good news continues. The merged company expects to cut $300 million from annual operating expenditures. These savings are expected to come from efficiencies in overlapping operations, streamlining business practices, and improved logistics. The companies also expect to achieve annual capital efficiencies of approximately $1 billion through elimination of redundant spending and targeting capital budgets to high-return, near term projects.
In an all-share deal worth $19.2 billion, Suncor has offered Petro-Canada shareholders 1.3 common shares of the new company for each Petro-Can share currently held. That represents a 25% premium over the 30-day weighted average trading price of Petro-Can shares. The completed deal would leave Suncor shareholders with 60% and Petro-Can shareholders with 40% of the new company worth over $46.0 billion.
There are regulatory and other hurdles to overcome before the deal is completed. That process may take six months. Then the speculation is that Sunoco retail gas stations will be rebranded with the red and white Petro-Can livery.
A wag once said that no good deed goes unpunished, the good deed here being the creation of a Canadian oil company with the critical mass to tackle new projects in the oil sands sector. But it is not yet a done deal, and like the proposed Inco-Falconbridge merger of 2006, it could be derailed. That would be a shame in an industry that deserves a strong Canadian presence but is currently dominated by foreign companies.