Suncor Energy Inc. SU-T is concentrating on its oil sands roots with its latest deal to buy the Fort Hills mine – something analysts say makes sense because it aligns with the company’s focus on increasing production in the Northern Alberta region.
The Calgary-based oil giant announced Wednesday night it will acquire the 21.3-per-cent stake that Vancouver-based Teck Resources Ltd. Teck-A-T holds in the Fort Hills project. At a cost of $1-billion, it’s the largest oil sands transaction in years, coming at a time of high crude prices and global energy security uncertainty.
Wednesday’s deal represents the latest in the company’s long-running bid to focus on that part of its portfolio. Last year it took over operations of Syncrude Canada Ltd., one of the country’s largest oil sands projects, and announced it was signing agreements with eight Indigenous communities to acquire all of TC Energy’s TRP-T stake in the Northern Courier Pipeline Limited Partnership, which connects Fort Hills with Suncor’s East Tank Farm.
In 2019, Suncor also announced it would spend $1.4-billion in low-carbon power cogeneration at its Oil Sands Base Plant, three years after it acquired its rival Canadian Oil Sands Ltd. in a $4.24-billion deal.
Laura Lau, chief investment officer with Brompton Group in Toronto, said it seems Suncor is creeping toward becoming a pure oil sands play.
“That’s what they know, that’s what they’ve done. And we’ve seen over the years they’ve divested gas assets, divested renewable assets,” she said in an interview.
“It makes sense, because it’s probably what they know best. I don’t think anybody is buying Suncor for renewable assets.”
Fort Hills, located 90 kilometres north of Fort McMurray, Alta., is the country’s newest oil sands mining project, starting operations in 2018 at a construction cost of $17-billion. It was plagued in its early years with operational problems as well as a government-mandated limit on production when the industry faced a squeeze on export pipeline capacity.
Suncor, as the operator of Fort Hills, was the logical buyer, said Ms. Lau – particularly because TotalEnergies SE, which holds a 24.6-per-cent stake in the asset, has made no secret of the fact it wants to exit the oil sands to better align with its climate strategy.
She thinks Suncor “must have some kind of line of sight” as to how to improve operations at Fort Hills, too, and compared the deal to a tug of war, much like driving down the purchase price of a house because it has a leaky roof.
“You say, ‘It’s going to cost me more money,’ so I’m sure that they tried to bargain that price down,” she said.
“Investor Day is coming in November. Maybe that’s when you say, ‘We got a good price and this is what we think we can do to improve the value.’ That’s what I would do.”
Ms. Lau also says there’s a good chance Suncor is in negotiations with Total to buy the French energy company’s share in Fort Hills.
Teck chief executive officer Jonathan Price told investors on the company’s third-quarter earnings call Thursday that “multiple parties” were bidding on Fort Hills, but the $1-billion price reflects Suncor’s long-term operational and production goals for the asset.
“We’re very satisfied with the valuation achieved here and we think it’s a good deal for our shareholders,” he said, adding that the Fort Hills deal was reflective of Teck’s own priority to concentrate on its copper assets.
“We know oil sands has been an overhang for us, and it’s consistent with our strategy of moving away from carbon toward green metals in the portfolio,” he said.
A National Bank of Canada research note issued Thursday said Suncor’s consolidation of its oil sands assets is “the most efficient way to optimize throughput, improve reliability and reduce costs” for the energy giant, even with an “uninspiring operational track record across its broader oil sands segment in recent years.”
Analysts also noted that the deal could be a drag on Suncor stocks in the medium term – particularly coming up to its third-quarter results on Nov. 2, when the company is expected to unveil details on lower-than-expected volumes from Fort Hills and, therefore, higher-than-expected operating costs.
“For these reasons, we will remain in ‘show me’ mode until operational momentum is captured in results,” they wrote.
Suncor analysts also opined that Suncor’s acquisition of Fort Hills was consistent with the company’s strategy of consolidating and optimizing its oil sands assets.
Still, analysts are “expecting a rough 36 months” at Fort Hills as the company works to improve the asset’s long-term performance, including developing more mine pits – which will decrease production and increase operating expenses by about 5 per cent relative to Suncor’s 2022 guidance.