Canadian Manufacturing

Suncor-Canadian Oil Sands merger questions answered

Why did Suncor want COS so much? Why has COS agreed to the acquisition? Who loses in the deal? Is more oil patch consolidation coming? Find answers here



CALGARY—Suncor Energy has reached a friendly takeover deal with Canadian Oil Sands after bumping up its all share offer by 12 per cent. The company now is offering 0.28 of a Suncor share for each COS share, resulting in a $6.6-billion friendly deal between the two Calgary-based oilsands companies.

Here are key things to know about the deal:

Why did Suncor want COS so much?
Suncor gets control of the 37 per cent interest COS has in the massive Syncrude oilsands operation, increasing its own share of the 350,000-barrel-a-day project to 49 per cent. Samir Kayande, an analyst at RS Energy Group in Calgary, says Suncor likely expects to decrease costs and improve operations at Syncrude once it has more control.

“You can assume that you can bring in better reliability. That will be key,” said Kayande.

The deal also allows Suncor to acquire COS while oil prices are down, setting it up for higher returns when prices climb.

“We know that probably $30 is the wrong price for oil. So as you get a commodity price rebound, picking up assets at low prices does make sense,” said Kayande.

Why has COS agreed to the deal?
With a single producing asset and no development project, the COS share price is more directly tied to oil prices than most oilsands companies. With oil prices down so much, COS could see its share price drop significantly if the deal fell through, said Robert Cooper, with the institutional sales and trading team at Acument Capital Markets.

“Correlation works both ways and you’ve got an oil price that’s falling off a cliff and has fallen off a cliff,” said Cooper. “If Suncor is to walk away, Canadian Oil Sands could be $4, $3, never mind $5. It would be a total blood bath and so this represents the best way out.”

Who loses in the deal?
With Suncor getting the asset it wanted and COS managing to get an increase in the offer, Bob Schulz from the University of Calgary’s Haskayne School of Business says the loser in the deal is Exxon Mobil’s Imperial Oil. The company is currently the operator of Syncrude with a 25 per cent ownership stake, but Schulz thinks Suncor’s larger stake will mean it can bump Imperial out of the control.

“They’re probably going to be out as operator,” Schulz said, adding that Imperial could also lose out on potential synergies with its own Kearl oilsands operation.

“Those synergies aren’t going to be there. It’s going to cause some real pencil sharpening for Imperial and Exxon,” said Schulz.

Is it a done deal?
Suncor still needs to get shareholder approval, but the COS board of directors and major shareholder Seymour Schulich support the deal. Suncor has once again extended its deadline for shareholders to tender their shares and they now have until Feb. 4. It has also lowered the threshold for the deal so now only needs the support of 51 per cent of shareholders, down from two-thirds.

Can we expect more consolidation in the oil patch?
Low oil prices have pushed down stock prices across the board, creating some great buying opportunities in the energy sector. COS shares were trading at more than $23 in August 2014, but were down to a little over $6 when Suncor made its offer in October. And with low oil prices hammering cash flow, analysts say companies with big debts and liquidity problems will be pressed to make deals.

“I think that, in a down market, M&A tends to be driven by liquidity concerns. And so that’s going to be the discipline that actually gets the sellers to the table,” said Kayande.

“The longer that oil prices stay low, the more of these sorts of transactions we see.”

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