Could Imperial Oil be eyeing rivals?

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Imperial Oil Ltd.'s deep pockets and extensive oil sands holdings have prompted speculation that it could take advantage of the crude-price collapse and bulk up on assets.

Investors and analysts have suggested Canadian Oil Sands Ltd. could be in Imperial's sights, as the two are partners in the Syncrude Canada Ltd. joint venture. FirstEnergy Capital Corp. has run some numbers on that prospect and other potential targets, MEG Energy Corp. and Cenovus Energy Inc. among them.

FirstEnergy analyst Michael Dunn says his research on the likelihood of a major deal is based on value, and the relative cost of absorbing an oil-sands rival whose share price is under pressure, more so than Imperial's need.

However, he points out that Imperial, which is 69.6-per-cent owned by Exxon Mobil Corp., is expected to generate a growing pile of free cash flow as crude markets recover over the next few years. Mr. Dunn adds that the company could take advantage of weakened competitors to boost output far quicker and more cheaply than building a project from scratch.

Merger and acquisition activity in the Canadian oil patch is poised to ramp up in the coming months as some players struggle to fund development, make debt payments and pay out dividends due to sharply lower outlooks for cash flow.

For Imperial, any deal would have to meet several criteria: it must be large-scale; have high-quality resource; include a producing or nearly producing project; generate high return on capital; and, given current low oil prices, deliver returns above its cost of capital, Mr. Dunn said.

Imperial has not traditionally been a major acquisition suitor in Canada, though it and Exxon Mobil have teamed up in recent years to buy Celtic Exploration Ltd., a liquids-rich gas producer, and a package of undeveloped oil sands assets from ConocoPhillips.

Imperial is most often discussed recently as a potential buyer of Canadian Oil Sands because of the cost saving it could achieve, on debt-servicing and other items. Suncor is also a Syncrude partner, so it might make sense for that company – whose own oil sands plant is right next door – to jointly bid as a way to shave more costs, he said.

Meanwhile, Canadian Oil Sands shares are worth about half of what they were a year ago. A recent slide to multi-year lows fueled speculation that Imperial could launch a bid.

Mr. Dunn said he foresees Imperial being able to offer bids in the upper twenty-dollars-per-share range for MEG or Cenovus, but is skeptical either would accept such an offer.

Both companies are known for having rich bitumen resources, and both face lower expectations for funding their expansions due to weakened crude prices. Mr. Dunn estimated that Imperial could achieve savings and reduced interest costs worth $12.27 per MEG share and $4.10 per Cenovus share.

Another potential acquisition target could be the Surmont oil sands project, run by ConocoPhillips and Total SA, Mr. Dunn said. That development currently pumps out 27,000 barrels per day and is set to add 123,000 bpd of new output later this year.

Imperial spokesman Pius Rolheiser declined to discuss the FirstEnergy report, saying the company does not comment on potential acquisitions or divestments.