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Petrocan can’t, not anymore
Government creation about to disappear into ‘new Suncor’ which CEO Rick George says will take on global supermajors in oil sands and become a ‘Canadian champion’ By Gary Park For Petroleum News
Exit, stage left, with barely a whimper … maybe just the hint of a shaky voice by CEO Ron Brenneman as he effectively signed the death certificate for Petro-Canada on June 4.
Before a smattering of shareholders, Brenneman started winding down his nine years at the helm of a company that was created 34 years ago as a purely state-owned enterprise designed to give Canadians what was called a “window” on the petroleum industry and a chance to open up frontiers.
It remained exclusively in government control until 1991 when 19.5 percent of those holdings were sold in an initial public offering. The share was reduced in further stages until the final 19 percent was sold in 2004.
“I really do think this is the logical next step in the evolution of Petro-Canada,” said Brenneman, after it was announced that company shareholders had voted 96 percent in favor of what Petro-Canada referred to as an amalgamation with Suncor Energy, but the rest of the world sees as a Suncor takeover.
He said Petro-Canada will continue “as a part of a much bigger, stronger entity with an extremely good position, not only in the oil sands, but across many of the businesses that the two companies together represent. I’m delighted with the way this whole thing may come together. It’s terrific.”
Suncor shareholders joined in the “union” of two companies with a combined market capitalization of C$48 billion and 22 billion barrels of resources by voting 98 percent to approve the C$23 billion all-share deal.
Remaining hurdles The major hurdles yet to be cleared involve ratification from Canada’s Competition Bureau (the equivalent of a U.S. anti-trust agency), a process that is taking longer than anticipated and is expected to come with conditions, and a decision by the government on whether to prolong a Petro-Canada birthright preventing any individual or company from owning more than 20 percent of Petro-Canada’s voting shares by carrying that restriction over to the new Suncor.
There’s no doubt where Suncor CEO Rick George, who will retain that post in the “new Suncor,” stands on the matter.
He has said the government should drop the restrictions once the merger is concluded, arguing that new federal investment legislation guarantees that Canada’s best interests can be safeguarded.
George, born in the U.S. and now a Canadian citizen, said the combination has the goal of becoming a “Canadian champion” to compete with the largest international oil companies, notably in the oil sands, and specifically going head-to-head with Royal Dutch Shell, ExxonMobil and France’s Total.
He said earlier that creating the fifth largest oil and gas company in North America “sets up in my mind a Canadian company that will compete against the Americans and the Europeans in our own backyard.”
From its beginnings, which put a spotlight on Canada’s oil and gas frontiers, Petro-Canada used billions of dollars of public or borrowed money rather than the drill bit to finance its initial growth, then expanded globally, but ultimately got a rough ride from the investment community, which viewed the company as an underperformer in its peer group, despite its operational and financial strength.
Hostile takeover a risk George said the two companies felt they had little choice but to “act decisively” or risk a hostile takeover bid by an international supermajor given the market turmoil that saw C$100 billion worth of projects cancelled or shelved.
“In tough times like these, it’s the companies who are able to adapt and make necessary course corrections” that endure, he said.
As things currently stand, the asset breakdown for the merged company would be 38 percent oil sands, 24 percent North Sea and international (from Petro-Canada’s presence in Europe, the Middle East and Trinidad), 14 percent refining and marketing, 13 percent in Canada’s East Coast offshore and 11 percent North American conventional oil and gas.
What will happen under new management to those holdings is unclear.
Brenneman told Petro-Canada’s final annual meeting that a wide range of growth opportunities have been sanctioned or are in development, including Trinidad gas and North Sea oil discoveries, along with Syrian gas and Libyan oil.
There’s already been a buzz — never confirmed — that state-owned China National Petroleum Corp. has made overtures to the two companies offering US$5 billion for the holdings in Syria and Libya.
Oil sands focus Beyond making it abundantly clear that the new entity will be an oil sands-focused operation, George is issuing no signals on what might happen to the international operations.
However, he did tell his shareholders that the “new Suncor will look very much like the Suncor you know.”
“We will continue to focus on developing our large resource base from our own mining and in-situ resources … and proceed with staged growth of our upgrading assets to produce higher value products here in Canada,” he said.
George said the “core long-term strategy” will be supported by natural gas production (to be used as a hedge against internal oil sands consumption), offshore production and international activities.
Once the transaction is concluded there will be a detailed review of all capital projects, with a priority on near-term cash flow potential, the highest anticipated return on capital and the lowest risk, George said.
The review will involve a “disciplined approach, but not a long one,” he said, noting that new production will be on-line about 18 months from the resumption of work on stalled projects.
Oil sands production up As an example of the “operational excellence” already being built into day-to-day operations to “give us a clear advantage when it comes time to resume our major growth projects,” George said Suncor has increased its oil sands production by 20 percent this year over a year ago, while reducing its cash operating costs by 15 percent.
That is being accompanied by a decline in construction labor and some materials costs of about 30 percent.
Brenneman, in a parting defense of Petro-Canada’s own delayed oil sands ventures, listed the Fort Hills mega-venture along with three in-situ projects among the “considerable options for future growth” in harness with four Suncor projects comprising an expansion of the Voyageur mine, a Voyageur upgrader and two more tranches at Firebag.
He was asked why Petro-Canada has not already proceeded with projects like Fort Hills when Imperial Oil has given the go-ahead to its Kearl Lake project to take advantage of declining steel and labor costs.
“We can actually accelerate some of the projects we have on hold, particularly in the oil sands,” Brenneman said. “But we need to go through them to see which ones will go first, which have the best economics and cash flow. As we put together our business plan for 2010, I expect we’ll start to get a better picture of how things might unfold.”
He estimated the merged company will rely on the oil sands to generate about 38 percent of its cash flow, but neither he nor George would discuss what, if any, assets would go on the block.
Topping Petro-Canada’s list is the Fort Hills project, whose mining portion carried a price tag last year of C$14 billion and is now estimated by junior partner UTS Energy at C$8 billion.
Analysts look to Voyageur But analysts believe Suncor’s stalled C$20 billion Voyageur project is more likely to resume first, with independent analyst Wilf Gobert rating Voyageur as a “bellwether project with the combination of oil prices going up and costs coming down.”
George, while giving high priority to the importance of cleaning up the oil sands’ environmental image, was not concerned about moves in the United States to limit imports from that resource.
“The U.S. consumes 15 to 16 million barrels of oil a day and produces less than half of that. If they don’t import from Canada then they have to go to other sources and Mexico is in steep decline and Venezuela is right behind, as is the North Sea.
“What the U.S. and our trade partners want is continuous improvement (in reducing) our air, land and water emissions, something that is high on our agenda,” he said.
Alberta Premier Ed Stelmach said the merger is “good news for the oil sands industry. … It shows that Alberta continues to be a good place to invest.”
He said the overwhelming shareholder backing is evidence that investors, many of them living outside Alberta, are satisfied with the province’s investment environment.
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