Stars align for Brenneman and his suffering investors

At last, Ron Brenneman showed them the money.

By stepping aside to allow in Suncor Energy, the Petro-Canada boss has rewritten his legacy and headed off a possible clash about his future. Before this, he was the fumbling CEO running the only big oil company that had managed to somehow miss the oil boom. Now he's the co-creator of a new corporate flag carrier that will be a symbol of Canadian energy power, and might even give Petrocan investors the financial reward they've become impatient for.

"These types of deals really have to come together at a time when all the stars are aligned," Mr. Brenneman said yesterday, and in recent months, the stars have done just that.

The financial crisis, the crash in energy prices, the rising cost of capital in the oil sands, a change in political winds and - let's not forget - the simmering frustration of a few large Petrocan shareholders made a deal once thought impossible possible.

Start with the upheaval in the credit markets, which, like the proverbial hangman's noose, has focused financial minds everywhere. And one of the side effects is that dull, conservative companies are proving that there is virtue in dullness.

Petrocan has made plenty of mistakes but its decision to resist the pressure to jack up its debt load - it has about half the net debt Suncor does - suddenly looks wise.

Since the day Lehman Brothers collapsed and the economic crisis entered a new and more dangerous phase, Petro-Canada has outperformed Suncor and most of the rest of the Calgary oil patch.

Companies that rely heavily on oil sands production for their revenue, like Suncor, also have been hit harder by the downturn in prices because of their higher operating costs. At crude prices of $40 (U.S.) a barrel, most are unprofitable, or nearly so.

Those factors narrowed the valuation gap between the two companies and allowed for a respectable deal: Petrocan shareholders will own 40 per cent of the merged company, more than they could have hoped for had a merger been negotiated a year or two ago. Mr. Brenneman gets a sinecure as executive vice-chairman and spots for three other Petrocan directors on the new board.

"It's a graceful exit," said one source who knows the Petrocan CEO.

But is it a politically palatable one? Mr. Brenneman and Suncor chief executive officer Rick George, who did not go to the federal government to try to get the deal cleared in advance, are taking a chance that the mood in Ottawa favours their union.

They're almost certainly right. The Conservatives were lambasted for allowing foreigners to buy the entire Canadian steel industry, the major aluminum producer and two major mining companies, and the criticism stung enough that a year ago they stopped a U.S. firm from buying the space unit of MacDonald Dettwiler and Associates.

There's little doubt, given the climate, that a foreign takeover play for Suncor or Petrocan would be unwelcome by the Harper government. Anyway, what's the political downside here? Other than some unspecified number of job losses in the merger, there isn't one.

The Red Wilson panel on competitiveness argued persuasively that Canada should do more to promote national champions in business. This would be one. If the merged company falls under the Petro-Canada Public Participation Act, as the partners say it will, it may save a headache for some future government.

As for Mr. Brenneman, among his biggest headaches was that after nine years as CEO, Bay Street had tired of him and lost faith in his ability to execute on Petrocan's costly expansion plan.

The Ontario Teachers' Pension Plan, the most public of the activist shareholders, doesn't deserve the credit for this deal; the talks were already under way as Teachers was acquiring its 3.3-per-cent stake in the company and beginning to agitate for change.

But Mr. Brenneman surely knew he would have to come up with compelling answers to some difficult questions if he wanted to avoid a confrontation with Teachers and its allies (which included, according to some, Manulife Financial's asset management arm, also a large shareholder).

How will he make the Fort Hills project pay in the new environment for oil? How can he justify having so much value trapped in Syncrude when other Petrocan assets need capital? Does it really make sense to stay in a low-return project like Libya?

Most importantly, how can he make sure that when the rebound comes, Petrocan shareholders won't be left behind, like they were in the last energy bull market?

Mr. Brenneman gave his answer to that last one yesterday: He's going to put them in Rick George's hands. So give the man credit: He did the right thing, not the easy thing.