In this 2009 file photo, workers leave the Suncor oil sands extraction facility near the town of Fort McMurray in Alberta.Mark Ralston/AFP / Getty Images
Canadian Oil Sands Ltd. shareholders have a good chance of a richer offer surfacing, though it's likely to come from current bidder Suncor Energy Inc. and not a third party, FirstEnergy Capital Corp. says.
This week, Canadian Oil Sands, which has the largest stake in the Syncrude Canada Ltd. partnership at 37 per cent, formally rejected Suncor's $4.5-billion hostile offer, calling it opportunistic and inadequate.
The target said it has begun the process of finding alternatives, including transactions with industry or financial players. Translation: a white knight willing to pay up.
FirstEnergy analyst Michael Dunn initially urged investors to tender to Suncor's bid, but in a note subtitled "On Second Thought," he now suggests investors hang tight and wait for a better deal, one that could come from Suncor.
Suncor, which also holds a stake in the Syncrude partnership, has offered 0.25 of one of its shares for each Canadian Oil Sands share, saying that its heft will remove many of the risks investors deal with now, including high debt and exposure to depressed crude prices.
Canadian Oil Sands' stock price has hung above the bid value since the offer was announced, showing investors are wagering that there's more value in the offing. The shares were fetching $9.78 on the Toronto Stock Exchange in midafternoon trading on Wednesday, compared with a bid value of $9.22.
Since Suncor launched its offensive, it was revealed that it had offered Canadian Oil Sands an exchange ratio of 0.32 of one of its shares during talks last April. Canadian Oil Sands' board rejected that and talks went no further.
"Upon some reflection it seems clear to us that Suncor's bid would need to be at least this high for [Canadian Oil Sands] shareholders to approve, and we believe that Suncor assumed as much when it went public with the current bid," Mr. Dunn wrote.
The odds of some other suitor being able to outbid Suncor – which has deep experience with oil sands in general and Syncrude in particular – aren't that strong, he said. The operation has struggled for years with poor reliability of the bitumen upgrading equipment, which has meant outages and missed production forecasts.
Imperial Oil Ltd., the second-largest Syncrude interest-owner at 25 per cent, has been speculated as a rival bidder though Mr. Dunn doubts it will wage a bidding war.
He said institutional investors, such as pension and private-equity funds, might "kick the tires," but he's skeptical that one will step up with a superior offer. Syncrude's value may suffer if the battle results in the operation being relegated to a secondary holding for Suncor and Imperial, and it keeps posting disappointing results, he said.
Barclays, meanwhile, is hedging its bets on a deal closing. Analyst Thomas Driscoll said that, based on the bank's target for Suncor shares, a higher bid from Suncor, into the 0.32-of-a-share range, would imply a Canadian Oil Sands stock price of $11 to $12.
However, if a deal falls through, he estimated that the shares could tumble to around $6. Mr. Driscoll's new target is $10.
Jeffrey Jones