Suncor goes hostile on Canadian Oil Sands

VANCOUVER —  Low crude oil prices have driven market valuations in the energy industry to historic lows, and Suncor Energy (TSX: SU; NYSE: SU) is hoping to take advantage of the downcycle with a hostile bid for Canadian Oil Sands (TSX: COS; US-OTC: COSWF).

On Oct. 5 Suncor offered 0.25 of a share for each Canadian Oil share tendered, which equates to $8.83 per share, or $4.3 billion.

Suncor president and CEO Steve Williams revealed on a conference call that he had tried to discuss a takeover in March and April, but Canadian Oil Sands rebuffed his overtures.

The offer represents a 43% premium based on the companies’ closing prices at the time of the offer, and a 35% premium to Canadian Oil Sands’ 30-day, volume-weighted average trading price. Suncor also pointed out it would absorb $2.3 billion in debt, which would boost the transaction value to $6.6 billion.

If the deal closes, Canadian Oil Sands shareholders would own 7.7% of the combined company, while Suncor would also boost its ownership in the Syncrude Canada joint venture from 12% to nearly 49%.

Syncrude is a Canadian oilsands partnership that also includes Imperial Oil (TSX: IMO; NYSE-MKT: IMO), Mocal Energy, Murphy Oil (NYSE: MUR), Nexen Energy (TSX: NXY; NYSE: NXY) and China’s Sinopec Oil Sands.

“The industry has experienced a significant deterioration of market fundamentals, with crude futures pricing declining,” Williams pointed out. “The futures curve for oil would suggest that it may be several years before we regain the pricing levels we anticipated at the time of the first offer. In light of this structural change in the market, we believe the current offer represents a full and fair value. The outlook for markets is challenging, particularly for stand-alone producers such as [Canadian Oil Sands].

Canadian Oil Sands’ share price had dropped 53%, or $10.28, since early 2014 en route to a $6.19 close at the time of the takeover offer.

Suncor is already the leading integrated energy producer in Alberta, and the deal would boost its output from 580,000 barrels per day (bpd) of oil to nearly 690,000 bpd, with over 80% of production from oilsands.

CFO Allister Cowan pointed out that Suncor has increased its dividend every year since 2002, and generated over $700 million in free cash flow over the first half of 2015, despite investing $1.9 billion in “growth opportunities.”

The company is attempting to woo share tenders with the promise of a healthier balance sheet, as it keeps a net debt to capitalization ratio of 17%, compared to Canadian Oil’s 36% ratio.

“When oilsand prices are discounted, Suncor’s integrated downstream benefits through the purchase of discounted feedstock into its refineries,” Williams added to the pitch.

“By processing the discounted crude into finished transportation fuels and selling those fuels at market price, [we] effectively capture a global price for oilsands crude production. In this way, our integrated downstream acts as a hedge against crude price differentials that hurt non-integrated oil producers such as [Canadian Oil Sands].”

BMO Capital Markets analyst Randy Ollenberger and CIBC analyst Arthur Grayfer both speculated that a competing bid could emerge due to the heavy discount on the offer. Ollenberger noted that Imperial Oil may be the “most logical” candidate, though a number of the members of the Syncrude partnership could step forward.

On Oct. 5 Canadian Oil Sands’ board called Suncor’s offer “opportunistic,” and unanimously rejected it for “not being in the best interests of the company.”

Canadian Oil adopted a shareholder rights plan — or so-called “poison pill” — that will trigger if any party acquires 20% or more of its shares, while allowing current shareholders to buy stock at a discount.

The company also added a condition wherein it will have 120 days to consider any further offers.

Suncor shares have traded within a 52-week window of $30.89 to $40.93, and closed at 34.83 at press time. The company has 1.5 billion shares outstanding for a $50.7-billion market capitalization.