An oil sands worker checks the oil during the first step of separation at the Suncor processing plant at their tar sands operations near Fort McMurray, in this September 17, 2014, file photo.© Todd Korol / Reuters
Suncor Energy Inc. has launched a $4.3-billion hostile bid for Canadian Oil Sands Ltd. in what could be the richest oil-patch deal of the year, aiming to take advantage of the company's battered share price amid a deep slump in energy prices.
Canadian Oil Sands' stock rocketed 55 per cent on Monday to $9.60 per share after Suncor announced the all-share deal. That is 11 per cent above Suncor's offer, valued at $8.65 a share as of Monday's close, suggesting investors are wagering a higher bid from Suncor or a rival bidder will arrive.
Suncor's unsolicited bid, if successful, would boost the company's ownership stake in the Syncrude Canada Ltd. joint venture to 49 per cent from 12 per cent currently. It comes after Canadian Oil Sands' board rejected an overture from Suncor executives in April, leading Suncor to reduce its offer as oil prices skidded to under $50 (U.S.) a barrel through the summer.
The hostile offer, which includes the assumption of $2.3-billion (Canadian) in Canadian Oil Sands' debt, is an indication that companies are chasing bargains as oil prices show few signs of a quick turnaround. A wave of consolidation had been expected by analysts and investment bankers as the sharp plunge in U.S. and world oil prices gathered momentum last spring. However, large acquisitions have failed to materialize, especially in the oil sands, in part because low oil prices made it difficult for companies to agree on valuations.
Suncor chief executive officer Steve Williams said the company has been assessing potential deals for several quarters. Its hostile bid comes months after it first approached Canadian Oil Sands – a period that saw U.S. crude prices drop 17 per cent. In an interview, he pitched the takeover as the best option for long-suffering Canadian Oil Sands shareholders who have seen their dividend chopped and growth prospects squelched.
"If you look at what Canadian Oil Sands shareholders have had to face, they've got a more stressed balance sheet than we have. They've had a 90-per-cent decrease in their dividend," Mr. Williams said. "They don't have to have those sorts of worries with Suncor."
The move is the latest by Suncor designed to beef up its exposure to oil-sands assets. Last month, the company paid $310-million to France's Total SA for an additional 10-per-cent slice in the Fort Hills mining project.
Canadian Oil Sands, which owns 36.74 per cent of Syncrude, has been plagued by operational setbacks, including a fire last month that weighed further on the company's stock price in recent weeks. The company has been "a pure play in operational disappointment," said Mason Granger, fund manager with Sentry Investments.
Some analysts doubt that a rival bid will emerge for Canadian Oil Sands. There was speculation that Imperial Oil Ltd. would be a possible bidder, but the company is unlikely to achieve the same savings through such a transaction as Suncor can, Michael Dunn, analyst at FirstEnergy Capital Corp., told clients. Imperial owns 25 per cent of Syncrude.
Due to its shrunken market value, Canadian Oil Sands offers Suncor the ability to acquire additional production at a fraction of the cost of building a new project. The offer price equates to $51,000 per flowing barrel of production versus a replacement cost of as much as $140,000 per flowing barrel, according to Mr. Dunn.
"We believe COS shareholders should tender their shares, as the transaction offers an exit for shareholders who have been nervous about low oil prices and COS' ability to withstand lower oil prices, but want a higher sale price on their shares," Mr. Dunn wrote in a note to clients.
"On the other hand, an exchange into Suncor shares represents a better and safer dividend payout for shareholders who were not looking for an exit out of their COS shareholdings."
Canadian Oil Sands said it "will review" Suncor's offer and "communicate a recommendation to shareholders as soon as possible." The firm said it "had previously engaged" Royal Bank of Canada as its financial adviser; Osler Hoskin & Harcourt LLP as its legal adviser; and Kingsdale Shareholder Services to assist Canadian Oil Sands' board in reviewing the proposed deal.
"Shareholders are urged not to take any action or make any decision with regard to the Suncor offer until the board has had an opportunity to fully review the Suncor offer and to make a recommendation as to its merits," Canadian Oil Sands said in its statement.
Suncor said the offer is for 0.25 of a Suncor share per Canadian Oil Sands share. The deal represents a premium of 43 per cent to the closing price of Canadian Oil Sands stock Friday on the Toronto Stock Exchange and 35 per cent to the average trading price of Canadian Oil Sands shares over the past 30 days to Oct. 2, Suncor said. The offer is open until Dec. 4, although it could be extended or withdrawn, the company said.
With a report from Carrie Tait
Jeffrey Jones