Canadian oil giant Suncor Energy launched October 5, 2015 an unsolicited $4.3 billion (US$3.3 billion) all-stock offer for oil sands producer Canadian Oil Sands.MARK RALSTON/AFP / Getty Images
Suncor Energy Inc. is zeroing in on operational problems at Syncrude Canada Ltd. as it seeks to convince wary Canadian Oil Sands Ltd. shareholders that a $4.5-billion hostile takeover is in their best interests.
In multiple meetings to sell Canadian Oil Sands (COS) shareholders on its bid, Suncor has touted the all-share deal as the best option for salvaging an oil sands plant that has been plagued by repeated breakdowns and struggled to reach full capacity of 350,000 barrels a day, according to a person familiar with the pitch.
Suncor is promoting its wherewithal to bring expertise to operations at Syncrude amid hopes that the company will sweeten its offer of 0.25 Suncor shares for each Canadian Oil Sands share.
Some COS shareholders have expressed deep reservations about the hostile bid, saying it is tantamount to theft and does not reflect the company's long-term value.
"My impression is that it's way too low," said Bill Mason, a portfolio manager at Denver-based Value Investment Advisors Inc. "Personally, I think that Suncor is trying to steal it."
COS, which owns 37 per cent of the Syncrude venture, is expected to start its formal defence to the hostile bid next Tuesday by mailing its response to shareholders.
Last week, the company adopted a shareholder rights plan in a move analysts said was designed to drum up a richer offer from Suncor or stir wider interest from a rival bidder. That plan called for 120 days to review bids, making Suncor's offer ineligible because it expires Dec. 4.
Analysts have said Suncor is likely to fight the plan in court. The company has so far indicated it won't budge on its offer, which had an implied value of $9.25 a share as of Wednesday's close. COS stock closed at $9.92 on the Toronto Stock Exchange on Wednesday – or 7 per cent above the bid value, suggesting investors still held out hope that a richer offer would emerge.
Some investors say any bid for COS should reflect much higher commodity prices, pointing to a slowdown in U.S. shale output and a coming meeting of the Organization of Petroleum Exporting Countries as signs that could lift oil prices from their current trough. West Texas intermediate crude on Wednesday fell 47 cents (U.S.) to $46.19 a barrel.
"I'd rather not sell at these prices," said Doug Warwick, managing director of TD Asset Management, which holds nearly 5 per cent of COS through mutual funds. "The reason we bought it was a high leverage to oil prices, which has not been a good thing the last year. But if you believe the price of energy is abnormally low and should be higher, then this is the sort of investment we'd like to continue to hold."
Suncor has sought to capitalize on the rout in the oil markets to beef up its position in the oil sands. It launched a hostile bid for its partner in Syncrude after an offer of $11.84 (Canadian) a share was rejected by COS's board in April. Suncor owns 12 per cent of Syncrude.
Last month, Suncor purchased an additional 10-per-cent stake in the $15-billion Fort Hills mine from Total SA for $310-million.
An increased ownership share of the Syncrude project would allow Suncor to devote more of its resources to the project, Suncor chief executive officer Steve Williams said when he first discussed the offer with investors last week.
But some analysts have questioned the company's strategy of deepening its exposure to a project with a spotty operational history. "Price-wise, they paid an attractive price for it, but again, it's the asset itself that we're not real optimistic about," said Lanny Pendill, an analyst at Edward Jones. "I'm really not sure what's going to change other than them just increasing their exposure to something we don't consider to be a reliable, high-quality asset."