Suncor dives into M&A waters

Makes unsolicited offer for Canadian Oil Sands, claims it can bring new skill set; COS fights back with ‘poison pill’ defense

GARY PARK

For Petroleum News

Suncor Energy has entered potentially hostile territory in its bid to acquire Canadian Oil Sands, the largest stakeholder in the Syncrude Canada venture, and bolster its already dominant position in the northern Alberta bitumen resource.

Launching a C$6.6 billion offer (including C$2.3 billion of debt) for COS’s 37 percent share of the six-company consortium, Suncor set a Dec. 4 deadline for backing from shareholders.

If successful, it would add almost 100,000 barrels per day of oil sands output to its current 424,000 bpd, taking advantage of its highly profitable facilities to upgrade and refine bitumen that reduce the squeeze from low oil prices.

Although Syncrude has the capacity to produce 350,000 bpd, its average volume has been closer to 250,000 bpd lately because of operational setbacks.

Suncor’s current oil sands operating costs are C$28 a barrel and edging lower, while Syncrude’s comparable costs are C$52.63 a barrel.

However, Suncor Chief Executive Officer Steve Williams is confident his company could provide valuable support to the Syncrude operator (Imperial Oil) and “accelerate the reliability improvement.”

He rejects the label “hostile” to describe Suncor’s bid, regardless of the fact that Suncor made a “gentle first time” approach in March to get the two sides to the negotiating table, followed by a written offer and discussion with Syncrude board chairman in April. Both overtures were spurned based on a lack of interest.

Williams said the direct approach to shareholders is lower than the original two - regulatory filings indicate the April bid was 22 percent higher - given the continued deterioration in market conditions and the pessimistic outlook for an oil price recovery.

Suncor’s formal offer on Oct. 5 of C$9.60 a share was a 43 percent premium on COS’s closing price on Oct. 2, but COS has decided to fight back, adopting a “poison pill defense” which could be triggered if anyone buys 20 percent or more of COS’s shares.

If that happens, other shareholders can buy stock at a discount, making the original acquisition proposal less attractive to the hostile bidder.

Bids permitted under the rights plan must be open for 120 days from Oct. 7.

Seymour Schulich, a Canadian billionaire who owns 5 percent of COS’s 25 million outstanding shares, has dismissed the offer as “ridiculous ... it’s not a low-ball offer, it’s a no-ball offer.”

He said the Suncor proposal is worth less than half the replacement value of the Syncrude joint venture.

“If (Suncor) succeeds I’ll go to court to get a valuation,” he told the Financial Post.

National Bank Financial analyst Kyle Preston rated the bid a “positive” for COS shareholders, but potentially viewed as negative for Suncor given the high cost and unreliable nature of the Syncrude operation.

Williams said he was not aware of any competing bids.

However, a report by the law firm of Fasken Martineau noted that over the 10 years to 2014 an average of only 14 of the 3,700 publicly listed companies in Canada were the target of an unsolicited bid on any given year.

“Competitive scenarios occurred infrequently, but when they did, shareholders were the clear winners and the hostile bidder was most often left empty-handed,” the firm said.

Among analysts there are doubts that Imperial (69.6 percent owned by ExxonMobil), and Syncrude’s two minority Chinese partners (Sinopec and CNOOC Ltd), would likely stand any chance of obtaining Canadian government approval to control the oil sands project, even if they contemplated a bid. The same thinking applies to other partners, U.S.-based Murphy Oil and Japan’s Mocal Energy.

Even so, FirstEnergy Capital analyst Michael Dunn thinks that regardless of what happens to COS, Suncor may have opened the door to the long-anticipated wave of offers for companies involved in the oil sands, such as Chinese-controlled MEG Energy and Cenovus Energy, along with mixed producers Baytex Energy and Penn West Petroleum.

“It has certainly lit a fire under the sector” after a slow period in the merger and acquisition field, said Mason Granger, a portfolio manager at Toronto-based Sentry Investments.