Canadian Oil Sands slams Suncor’s $4.5-billion takeover bid as ‘exploitive’

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Suncor Energy Inc. is trying to take advantage of its insider status in the Syncrude Canada project to expand its oil sands empire at fire-sale prices, Canadian Oil Sands Ltd.'s chief executive officer said as his company fends off a hostile takeover bid.

Canadian Oil Sands (COS), which owns 37 per cent of the Syncrude oil sands mine, urged shareholders on Monday to reject Suncor's $4.5-billion unsolicited bid, calling the offer an "exploitive" and "opportunistic" grab for assets amid one of the worst downturns in years.

CEO Ryan Kubik said Suncor's 12-per-cent ownership stake in the mine gave it access to information not yet disclosed to COS shareholders, lending an unfair advantage as it launched its unsolicited play for the largest Syncrude owner earlier this month. The knowledge included details around a stepped-up cost-cutting program under way at the mega-mine as well as COS's 2016 budgeting process, he said.

"Suncor is essentially an insider. They've been sitting at the Syncrude operation. They understand all the initiatives under way, and information that our shareholders, quite frankly, don't even know," Mr. Kubik said in an interview, although he sidestepped a question about whether such knowledge raised legal concerns.

"They can use that information to capture value before it's fully recognized in the market and fully understood by our shareholders."

The unanimous rejection of Suncor's hostile bid by COS's board points to sharp disagreements over deal values in a market analysts and investment bankers had described as ripe for consolidation.

Several oil-patch deals have piled up in recent weeks, but there are still widely different views on whether and how fast oil prices will recover.

COS said Monday it remains open to a possible joint venture, merger or corporate sale, though Mr. Kubik said the company had not entertained any competing offers before or after Suncor announced its bid.

Still, its shares remain well above Suncor's bid price, showing how investors are wagering on a higher bid surfacing, even as U.S. benchmark oil prices fell $1.37 (U.S.) a barrel to $45.89.

Suncor's shares closed at $36.36 (Canadian) on the Toronto Stock Exchange on Monday, putting the offer value at $9.09 per Canadian Oil Sands share. Canadian Oil Sands closed at $9.77.

Suncor said COS's recommendation relies "almost entirely" on hopes for a near-term recovery in oil prices, while ignoring the potential for further declines and the negative impact on COS shareholders of the company's high debt load. In a statement, Suncor CEO Steve Williams rejected COS's comments and insisted the offer price of 0.25 Suncor shares for each COS share reflects a new business reality.

"It also represents an opportunity for investment in a financially stronger, more diversified and stable company that has considerable upside potential in a rising price environment, but can also deliver significant value should oil prices stay lower for longer," he said.

But Mr. Kubik said Suncor's own investments tell a different story, pointing to the company's recent deal for an additional 10-per-cent slice of its $15-billion Fort Hills mine.

"They're out telling their shareholders that they believe oil prices are going to be significantly higher – $90 [U.S.] to $100. And they're making investments in their business today … based on that expectation," he said.

The war-of-words comes amid speculation that a counteroffer could emerge for COS as U.S. oil prices languish under $50 a barrel, keeping financial pressure on debt-saddled producers that spent lavishly when oil was closer to $100.

Imperial Oil Ltd., which owns 25 per cent of Syncrude, has been among the rumoured rival bidders for the company. A spokesman for Imperial said the company does not comment on speculation.

COS on Monday bumped its 2015 estimate for cost savings for the Syncrude project to $1.3-billion (Canadian), from $900-million previously.

But it chopped its production guidance for the year to between 92 million and 97 million barrels, down from 96 million to 107 million barrels expected in July.

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The two sides of the Suncor debate

Suncor Energy Inc.'s $4.5-billion hostile bid is the last best hope for Canadian Oil Sands Ltd. shareholders, who have watched as the stock price has dwindled. Or, it's a brazen attempt to scoop up a unique asset on the cheap, just before any oil-price or operational recovery can boost its value.

Both have stakes in the Syncrude Canada Ltd. joint venture, and if the deal proceeds, Suncor will have the largest interest by far at nearly 50 per cent. Here are the players' arguments for and against the offer.

Suncor's case

Beefier balance sheet: Canada's biggest energy company has the superior finances and diversified business structure that will allow investors to maintain exposure to oil prices with far less risk. Suncor CEO Steve Williams: "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."

Ponderous premium: The all-cash offer represents a big lift to the price of Canadian Oil Sands shares before Suncor launched its bid.

Syncrude fixes: With a bigger interest, Suncor will be able to dedicate more of its resources and oil sands expertise to improving the operational performance at Syncrude Canada Ltd., whose partners have suffered through several mechanical outages that have translated into downtime and missed production targets.

Oil-price pull: Canadian Oil Sands is counting on higher prices to rescue the company and its share price. Suncor says its target is glossing over its high debt and its long-term fate if prices fall or even stay at current levels. Mr. Williams: "The near- to midterm prospects for significant price recovery appear poor. The outlook for market is very challenging, particularly for stand-alone producers such as Canadian Oil Sands."

Canadian Oil Sands' case

Low-ball: Suncor is taking advantage of market and political turmoil to try to snap the company up for far less than what it is worth. Since the bid was announced, its shares have hovered above the offer. Canadian Oil Sands CEO Ryan Kubik: "Their offer might offer value to Suncor shareholders, it might help them build their Suncor empire, but it's clearly not in the interests of Canadian Oil Sands shareholders."

Knowledge is power: As a Syncrude partner, Suncor knew the details of next year's budget and a plan for major cost cuts before they were made public, giving it a major advantage over Canadian Oil Sands shareholders.

Sit tight: Under the cover of a new shareholder rights plan, the company and its advisers are starting a search for strategic alternatives, which could involve a merger or partnership with an energy-industry or financial player, or an outright sale for a richer price.

Oil-price push: Canadian Oil Sands offers a pure play in an established oil sands project that upgrades bitumen into light synthetic oil. That gives investors a unique vehicle that closely tracks oil markets. Mr. Kubik: "I talk to our shareholders all the time and that's one of the key reasons they hold the stock today. We don't need to see $100 [U.S.] oil again to justify this investment. A small change in the oil price from today's levels will increase the value of our business."

Jeffrey Jones