UTS Energy victorious — for now

Oil sands junior persuades shareholders to rebuff Total bid, but now must show it has a better plan; draws hope from reduced costs

Gary Park

For Petroleum News

Having successfully played the role of David in beating back Total, the French energy Goliath, Canadian-based UTS Energy has an even more daunting task ahead.

It now has to prove to its shareholders, who spurned Total’s hostile C$830 million takeover bid, that their trust in the company is not misplaced.

And it might have derived some comfort from oil sands powerhouses, Petro-Canada and Husky Energy, who have found ways to slice a large chunk off earlier cost estimates for megaprojects.

From the time Total launched its initial offer of C$1.30 a share and even after raising that to C$1.75, UTS investors were assured the proposal was “inadequate and not in the best interest of UTS.”

Despite not having a single drop of oil production and despite the dramatic downturn in oil sands development, UTS management insisted Total was underbidding for the company’s 20 percent stake in Petro-Canada’s Fort Hills project and its joint stake in three other assets with Canadian zinc miner Teck Cominco.

Tristone Capital analyst Chris Feltin put a value of C$2.10 a share on UTS, suggesting Total seemed intent on buying out UTS “essentially for free.” Many others shared similar views.

Emboldened by that support, UTS shareholders failed to tender in sufficient volumes for Total to believe it could acquire all of the outstanding common shares, based on its belief that the certainty of cash would prevail over the uncertainty and risk of UTS’s stalled, or slow-moving ventures.

Total moving on

Michael Borrell, president of its Canadian unit, said Total will now concentrate on spending up to C$20 billion on its other long-term oil sands projects, targeting production of 250,000 barrels per day from its three major projects, while keeping an eye out for other acquisition opportunities.

He said UTS shareholders have “clearly come back to us and said they didn’t agree with our analysis (of UTS’s worth). So we’ll move on as an organization,” he said.

Borrell said Total was “very rigorous and very disciplined in developing a number for UTS,” noting the latest offer represented a 111 percent premium for UTS.

UTS Chief Executive Officer Will Roach said Total’s withdrawal was a “good day” for his shareholders, allowing the company to continue running a data room for prospective buyers while pointing to a number of alternatives, such as unloading its stake in Fort Hills or other assets, selling the company outright, or exploring mergers or acquisitions.

Not everyone is sold on the chances of a transaction. BMO Nesbitt Burns analyst Randy Ollenberger suggested UTS has been “pretty well shopped and nobody stepped forward.”

But Roach told the Financial Post that several “financially credible counterparties” are still pondering an offer for UTS.

Unless the junior can quickly unveil a plan it will face some disgruntled shareholders, such as Dennis da Silva, a fund manager at Middlefield Capital, who said a failure to deliver on that promise would be a source of “potential discontent.”

Fort Hills’ costs down

Petro-Canada even dangled some shreds of hope April 28 when Chief Executive Officer Ron Brenneman disclosed that a review of costs during the current oil sands lull has slashed the estimated cost of the Fort Hills mine to under C$10 billion from C$14 billion just five months ago.

He attributed that dramatic rollback to lower costs for steel and pipe, a drop in expected wage rates and wage escalation and improved productivity because of the changed construction climate in Alberta.

Brenneman didn’t mention whether the same factors have contributed similarly to the upgrader associated with Fort Hills, which carried a C$10 billion price tag before it was shelved last year.

He said the “rough” revised estimate is “pretty encouraging to us because, even on a standalone basis, we could probably generate a double-digit return at oil prices of $60 per barrel.”

Brenneman said that if the merger with Suncor goes ahead, there could be further cost-cutting opportunities through infrastructure sharing.

Pressed on whether Fort Hills could succeed as a standalone project, he said commodity prices would have to regain an economic threshold and there would have to be some “opening up in the financial markets” to assure Petro-Canada that it could go to those markets if needed.

Husky has had a similar experience in reviewing its budget for the Sunrise project, a joint venture with BP.

Chief Executive Officer John Lau said estimates for the first phase of 60,000 barrels per day (about one-third of the ultimate objective) have been reduced to C$2.5 billion from C$4.5 billion because of postponements and cancellations of about C$100 billion in oil sands projects.