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King of its domain Suncor Energy succeeds in bid to take over Canadian Oil Sands, promising operational improvements, but faces C$4B funding deficit GARY PARK For Petroleum News
In boxing terminology, Suncor Energy has become the undisputed heavyweight champion of Alberta’s oil sands by taking a decisive step towards closing its C$6.8 billion takeover of Canadian Oil Sands, the largest shareholder in the Syncrude Canada consortium.
But Suncor may quickly find itself reeling from a series of body blows that threaten to saddle it with a funding deficit estimated at C$4 billion by analysts at Toronto-Dominion Bank and Barclays.
After a bare-knuckles brawl that lasted more than four months, 72.9 percent of COS shares were tendered to Suncor, which extended its offer by another 17 days in an effort to make the verdict unanimous before it forces the sale at a shareholder meeting on March 21.
For the two companies, however, Moody’s Investors Service served up some bad medicine by downgrading the debt of both.
Citing the impact of weak oil prices, the rating agency cut COS’s rating to junk status, cutting it to Ba3 from Baa3 and lowered the unsecured debt rating on Suncor to Baa1 from A3.
That came two months after Moody’s put Suncor and many other Canadian oil producers under review for possible downgrade in response to the market slump.
Even so, Moody’s Senior Vice President Terry Marshall said COS’s rating is supported by its long-lived, low-decline reserves and its ownership by Suncor.
Once the transaction is finalized, Suncor will have control of oil sands production capacity of about 600,000 barrels per day.
Suncor pleased with support “We’re pleased with the strong level of support from COS shareholders,” said Suncor Chief Executive Officer Steve Williams. “From the outset, we’ve spoken about the excellent value this offer creates for both COS and Suncor shareholders and I’m looking forward to delivering on that commitment.”
His company wasted no time in putting its stamp on the deal by appointing a new executive team and directors for COS, affirming its belief that COS has long been dragged down by its management style.
Regulator filings show that the top five executives at COS are entitled to payouts totaling C$7.35 million in the event that they are terminated following a change of company control.
A Suncor spokeswoman also disclosed that another two dozen COS employees will learn by the end of February if they will become Suncor staff or get laid off following a transition phase.
She told the Calgary Herald that the focus is on “continuity, as well as planning and preparing for the full integration.”
The new chairman of COS is Harry Roberts, a retired former executive of Petro-Canada (which merged with Suncor) and Suncor.
‘Best-in-breed’ Greg Pardy, an analyst with RBC Dominion Securities, in recommending COS shareholders surrender to the Suncor offer, said Suncor has “re-engineered itself as a best-in-breed integrated oil producer by walking the talk of capital discipline, driving down its cost structure and maintaining a solid financial position.”
He said Suncor now stands to benefit from improving oil prices and lower operating costs at Syncrude by increasing its stake in the operation to 49 percent from 12 percent.
Suncor has given no indication yet that it wants to terminate a 10-year management contract at Syncrude that is held by Imperial Oil, which owns 25 percent of the facility.
However, Kyle Preston, an analyst with National Bank Financial, said Suncor is expected to become “more engaged with the operational aspects of Syncrude and work more closely with Exxon/Imperial to identify and implement operational improvements, with the ultimate goal of improving reliability and utilization of the Syncrude operations.”
“Longer term, we believe there is a greater likelihood of Suncor taking over operatorship of Syncrude and possibly integrating the operation with its own oil sands assets, which could provide significant upside leverage to cash flow, especially in a rising oil price environment.”
Two big-ticket projects Suncor and its partners are hoping to start production in 2017 from two big-ticket projects - the C$13.5 billion Fort Hills oil sands mine in Alberta and the C$14 billion Hebron project offshore Newfoundland.
Williams agreed that Suncor faces the prospect of further cuts to its capital and operating budgets now that oil prices are projected to average US$39 a barrel this year, down 22 percent from its previous prediction.
“We don’t particularly like it. It’s tougher than we anticipated when we started, but our plan is - even at (oil prices in the mid-US$30) - to be able to take (Fort Hills and Hebron) through to completion,” he said.
But Williams said Suncor has no plans to cut its dividend, which it presented as a major selling feature to COS investors, despite anxiety among credit-rating agencies about the industry’s mounting debt burden.
Morgan Stanley has warned the global supply overhang is unlikely to start shrinking before 2017, while FirstEnergy Capital has dramatically reduced its WTI price forecast to a 2016 average of US$37.25 and US$55 in 2017, down by US$10-US$15 from its previous outlook.
FirstEnergy Vice President Martin King expects many producers will be announcing further spending cuts as they roll out fourth-quarter earnings.
Suncor has already cut its 2016 capital spending program by 10 percent from its November guidance to a range of C$6 billion-C$6.5 billion, although its production target was left untouched. It had already reduced its payroll by a net 1,700, up sharply from its initial target of 1,000.
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