Bulldozers work clearing an area at the new Suncor Fort Hills tar sands mining operations near Fort McMurray, Alberta, September 17, 2014.TODD KOROL/Reuters
Suncor Energy Inc.'s deal for 10 per cent of Total SA's stake in the massive Fort Hills bitumen project shows that plunging oil prices have dramatically crimped asset values in northern Alberta.
Suncor this week broke a 15-month dry spell in acquisitions involving bitumen assets, agreeing to pay the French energy company $310-million to increase its ownership of the mining venture to 50.8 per cent.
The transaction reflects weakened values for properties in the oil sands, where high costs and limited access to global crude markets have compounded the challenges of skidding U.S. and world oil prices.
Some analysts say Suncor is getting a hefty bargain, assuming oil prices rebound. Raymond James Ltd. analysts led by Chris Cox pegged the value of the acquired interest at $575-million – a premium of 85 per cent compared with the purchase price. That's based on a long-term West Texas intermediate oil price of $70 (U.S.). Total was estimated to have spent about $800-million on its 10 per cent interest to date.
"A good house in a bad neighbourhood still has value," said Samir Kayande, analyst at ITG Investment Research in Calgary.
"So then the question is one of whether Suncor paid what it was worth, and we think that they got fair value in the deal, assuming a recovery in WTI to $70" per barrel, he said.
But other analysts have questioned Suncor's move amid signs that crude prices could remain subdued for years.
"While the price tag is arguably attractive, some may call into question the rationale for increasing its exposure to what is broadly considered an uneconomic project at current strip prices," Menno Hulshof, analyst at Toronto-Dominion Bank, said in a note.
U.S. crude prices have been stuck under $50 for months, even as signs emerge that shale production in regions such as North Dakota's Bakken formation is starting to ebb. Concerns over China's economic health have added to anxieties, dampening expectations of a sharp rebound in demand.
Suncor has said it expects Fort Hills to generate a 13-per-cent after-tax rate of return, assuming WTI oil prices of $95. The mine, which will cost $15-billion (Canadian) to develop, is expected to pump 180,000 barrels per day for 50 years starting in 2017.
"We don't make 50-year decisions based on the current strip price," Suncor spokeswoman Sneh Seetal said on Tuesday.
"I think what's important to remember is that Fort Hills is a resource that has exceptional quality. It has an expected operating life of 50 years and we would expect to see multiple price cycles over the course of that 50-year period."
The notion that crude prices could remain lower for longer has stoked speculation that more deals are likely to emerge – particularly as asset values drop and debt-heavy companies seek to shore up finances.
Earlier this month, for example, Penn West Petroleum Ltd. sold a package of light oil properties in Alberta to Cardinal Energy Ltd. for $192.5-million.
However, transactions in the oil sands have been few and far between. The last deal, in June, 2014, saw closely held Osum Oil Sands Corp. pay $325-million to Royal Dutch Shell PLC to acquire about 6,700 barrels of bitumen per day of production.