Two sides of takeover battle digging in

Suncor Energy, Canadian Oil Sands in bitter battle; Suncor accused of ‘exploitive offer’; COS labeled as ‘single asset’ operation

GARY PARK

For Petroleum News

Suncor Energy’s hostile bid to acquire the largest shareholder in Alberta’s Syncrude Canada oil sands operation is quickly evolving from a skirmish to a heavyweight slugfest.

Two weeks after Suncor’s initial offer of C$4.3 billion for Canadian Oil Sands, the two sides have opted for a no-holds-barred duel.

COS has a 37 percent share of Syncrude Canada, while Suncor already owns 12 percent of the seven-company consortium. To date, no competing offers have surfaced.

COS said its board had unanimously urged shareholders to reject the “undervalued, opportunistic and exploitive Suncor offer,” which it said “substantially undervalues” the asset.

COS laid out 15 “compelling reasons” for rejecting the all-share deal, saying the proposed transaction takes unfair advantage of current political, economic and regulatory uncertainty in the oil industry.

“It is no coincidence that the bid was made within six weeks of COS shares trading at their lowest price in 15 years,” COS said in a letter.

“Through its bid, Suncor is attempting to add COS’s proved and probable reserves and 46-year production life without paying a fair price.”

COS Chief Executive Officer Ryan Kubik added to the ill will by telling the Financial Post his board believes Suncor was using a low point in the crude oil price cycle and uncertainty around the greenhouse gas measures being developed by the Alberta government to sharply discount COS’s value.

“We have not announced the 2016 budget, but this is an example of some of the inside information Suncor was seeing at the joint venture table,” he said. “They are contributing to discussions about cost reductions, about reliability initiatives .... so they can take a view on that information before it is publicly disclosed and before COS shareholders and the market knows about it.”

Kubik noted that Suncor acquired an additional 10 percent of the Fort Hills oil sands mine from its joint-venture partner Total for C$56,000 per barrel of expected production at what was viewed as a discount price, before offering C$54,000 for the COS holding.

Suncor retaliates

Chief Executive Officer Steve Williams said COS provided no evidence that detracted from “the strength of (Suncor’s) compelling offer,” which provided a price premium of 43 percent and a dividend increase of 45 percent, along with an opportunity to participate in a “financially stronger, more diversified and stable company that has considerable upside potential in a rising price environment, but can also deliver significant value should oil prices stay lower for longer.”

Suncor noted that over the five years prior to the announcement of its offer, Suncor delivered total shareholder returns (including dividends) of 15 percent, compared with a total return of minus 69 percent for COS shareholders.

It said that over 13 years of consecutive annual dividend increases the payout has grown by 190 percent compared with a 90 percent decrease in COS dividends.

Suncor said it has “proven ability to generate value for shareholders through its integrated business model (exploration, production and refining).”

In contrast, it said, COS “relies entirely on the performance of Syncrude, a single asset over which it has no operating control” and has only limited ability to create value given ongoing operational challenges at Syncrude which has reportedly seldom reached its full capacity of 350,000 barrels per day.

“My impression is that it’s way too low,” said Bill Mason, a portfolio manager at Denver-based Value Investment Advisors. “Personally, I think Suncor is trying to steal” COS.

A shareholders rights plan adopted by COS has set 120 days to review bids, making Suncor’s offer ineligible because it expires Dec. 4, setting the stage for Suncor to mount a court challenge.

Others say any bid for COS should reflect much higher commodity prices, pointing to a slowdown in U.S. share production and an impending meeting of OPEC, both of which could lift crude prices out of their current slump.

The battle occurs at an awkward time for Canada’s securities regulators, who are drafting new takeover rules that mirror COS’s rights plan.

Lawyers across Canada are paying close attention to any developments as evidence of how provincial and territorial regulators will deal with future hostile takeovers, having published a proposal in March that would change the minimum takeover period to 120 days from 35.

They view the Alberta Securities Commission handling of the Suncor bid as potentially precedent setting.

University of Alberta economics professor Vikas Mehorta said the commission will have to deal with the other 12 securities regulators to avoid “going out on a limb and setting a bad precedent for the other regulators.”