Suncor Energy Inc. and Petro-Canada shook up the oil patch Monday with a multibillion-dollar marriage that would create the biggest energy company in the country, and clear the way for a quick resumption of some stalled oil sands spending.
Suncor's proposed all-stock takeover of its rival drove Petro-Canada's stock up by almost 27 per cent to $37.50 Monday morning, while Suncor rose nearly 4 per cent to $32.11.
The deal would create a new champion in the Canadian oil patch and unite two of the biggest players in the oil sands of northern Alberta, provided that the companies can stickhandle their way around federal legislation that was once thought to make Petro-Canada immune to a takeover. Under the Petro-Canada Public Participation Act, no person or company can own or control more than 20 per cent of the company's voting shares, and the head office must remain in Calgary.
However, by structuring the transaction as a merger, the two companies said they can avoid falling afoul of that act, while creating a company that is more financially capable of pressing ahead through the current downturn.
"This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," said Rick George, Suncor's current chief executive officer and prospective head of the joint venture.
The new company will be better able to compete with the industry's top players, whose oil sands spending has been far less affected than comparatively smaller players like Suncor, Mr. George said.
"The super majors, particularly Exxon and Shell, can invest through the bottom part of the cycle and are improving their position in Canada. We at Suncor had two options: we could kind of pull back [on capital plans] which we obviously did … or do something that would really strengthen our position and allow us to look at investing and coming out of this cycle stronger than ever," he said.
"This merger with Petro-Canada is something that's going to accomplish that. … It will be the fifth-largest oil company in North America and it will be one that can compete on many fronts."
Based on Friday's closing prices, the deal is valued at $19.1-billion.
Combined, the two companies will achieve $300-million in operating synergies and an additional $1-billion in capital synergies, they said. Capital synergies will come from moves like sharing infrastructure. For example, Petro-Canada CEO and president Ron Brenneman - who will become executive vice-chairman in the new company - said his company's proposed Fort Hills oil sands mind could reduce its first-phase development costs by using Suncor's pipeline infrastructure.
The merger will mean "some near-term job reductions" in order to achieve operational synergies, but will also create the possibility of putting other workers back on the job, said Mr. George.
"We expect increased investment, particularly in Canada, which will actually create more construction jobs near-term, more operating jobs in the mid to long term and wealth creation in Canada in terms of investment employment and taxes paid," he said.
The two companies have a long slate of projects under development, but Mr. George said the obvious "low-hanging fruit" for renewed capital spending is Suncor's Firebag 3 oil sands expansion, which was nearly 40 per cent built when work was halted this year.
"That's an easy one," Mr. George said.
The companies said in a statement early Monday that Petro-Canada shareholders would receive 1.28 shares of the new company for each share they own. Suncor stockholders would get one for one.
Suncor shareholders would end up holding 60 per cent of the combined energy giant, whose market capitalization is pegged at $43.3-billion.
The new corporate structure would retain the Suncor name, but continue to operate Petro-Canada's retail assets under the Petro-Canada brand.
With an oil resource that will last the combined company a full century, the two company chiefs said Monday they intend to focus their attention on the oil sands in the future. However, they also intend to seek international legal approvals for the transaction, and indicated that they have no immediate plans to sell off some of Petro-Canada's foreign assets.
"International assets are important, absolutely," Mr. George said. "The real focus is going to be on near-term cash flow and return on capital. But the whole portfolio of both companies is important, that's our going-in position."
UBS Securities Canada Inc. cited significant benefits of the deal but said the key concern is that it removes Suncor's "pure play" nature, which investors have rewarded with a premium valuation.
The companies said the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18-billion based on Friday's closing prices on the Toronto Stock Exchange.
John Stephenson, portfolio manager of First Asset Funds Inc., said the proposed deal will likely be followed by other major takeovers of Canadian companies in the oil patch because of the sheer cost of developing oil sands properties when crude oil prices are depressed.
France's Total SA is already engaged in a hostile takeover bid for UTS Energy Corp., Mr. Stephenson noted.
OPTI Canada Inc. is also likely to be taken over at some point, he said, with Nexen Inc. the potential acquisitor because they are already joint-venture partners in the Long Lake oil sands project.
Petro-Canada has been under increasing pressure from shareholders unhappy with its performance and with the ballooning costs at expansion projects such as Fort Hills, the centrepiece of the company's oil sands strategy. Last month, the Ontario Teachers' Pension Plan disclosed that it had acquired 3.3 per cent of the company and was in talks with management on how to give life to its lacklustre share price.
Suncor is one of only a handful of domestic energy companies large enough to swallow Petrocan, and is among the most experienced firms in the world at running technologically complex oil sands projects. It completed its first oil sands plant in 1967, decades before energy companies from around the world began investing billions of dollars to claim land and extract some of the estimated 173 billion barrels of recoverable oil in the region.
The merger "makes a lot sense," said Greg Boland, CEO of West Face Capital, a Toronto investment firm that is a major Petro-Canada shareholder. "It's just that nobody thought it would happen because of the Petro-Canada Act."
Suncor could potentially get around the law by appealing to the federal government for a change to the ownership rule, or by structuring the deal as a reverse takeover in which, legally speaking, Petro-Canada would be taking over Suncor, Mr. Boland said.
After watching several industry-leading Canadian companies, including Alcan Inc., Inco Ltd. and Falconbridge Ltd., be taken over by foreign interests, Ottawa might be receptive to a domestic merger that would create a new national champion in the oil patch.
The federal government was openly supportive of the 2002 union between two large Calgary energy companies, PanCanadian Energy Corp. and Alberta Energy Co. Ltd., that created EnCana Corp. - although neither of those companies had the federal lineage that Petro-Canada does.
Suncor and Petro-Canada have already come close to a deal once before. A few years ago, Suncor reached an advanced stage of negotiations with Petro-Canada, according to a banker involved in those talks. But the deal was scuttled because the federal government refused to provide assurances that it would move quickly to revoke or amend its legislation. Another source said there were other obstacles that derailed that effort as well, though he was not specific.
But another financier in Calgary said the takeover might create an "awkward" situation for the Harper government because other potential suitors have approached Petro-Canada in the past. "How is the government saying, we'll take these guys [Suncor]and not anyone else?" he said. "There are a bunch of other companies who covet those assets."
EnCana and Imperial Oil Ltd. are the only two Canadian oil companies larger than Suncor and both have extensive operations in the Athabasca region. However, any move by Imperial on Petro-Canada risks being attacked as a foreign takeover in disguise because it is controlled by ExxonMobil Corp. of Irving, Tex.
Petro-Canada was created as a federal Crown corporation in 1975 by the Pierre Trudeau government as a tool to develop the domestic oil and gas industry and to take over the federal interest in Syncrude, a consortium that still manages one of the oldest oil sands developments. The government of Brian Mulroney began to privatize Petrocan in 1991.
Ottawa sold its last remaining stake in 2004, but the ownership limits remained. Petro-Canada operates around the world, including Libya, Tobago and Syria.
With files from Virginia Galt