These energy companies are potential takeover targets: Citigroup

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Suncor Energy Inc. and Imperial Oil Ltd. have the strongest potential among Canada's large energy companies to scoop up rivals or various assets as the industry slump drags on, Citigroup says.

Suncor and Imperial, whose profitable refining assets and strong balance sheets have served them well as crude prices collapsed, could decide to take advantage of smaller oil sands producers trading near or below book value, the U.S.-based bank said in a report.

Some investment bankers and energy executives have said it is likely that merger and acquisition activity will pick up after a slow first eight months of the year as would-be buyers and sellers become more resigned to the idea that the downturn will persist.

"Suncor and Imperial are the best positioned to act as consolidators in the group, in our view," Citi said.

Potential targets include MEG Energy Corp. and Canadian Oil Sands Ltd., which currently trade at 0.5 times and 0.8 times book value, respectively, it said.

Either could increase cash flow per share for a buyer if overhead and growth-spending cuts are made, the bank said. There could be more gains if MEG's or Canadian Oil Sands' debt can be renegotiated at Suncor's or Imperial's superior ratings.

Canadian Oil Sands is the largest owner in Syncrude Canada, which suffered an outage two weeks ago due to a fire at the northern Alberta facility. Imperial and Suncor are also partners in the joint venture.

Suncor chief executive officer Steve Williams has said his company has too much cash on its balance sheet and has noted that prices for potential acquisitions have fallen to levels that make them interesting. He said, however, that time is on Suncor's side.

"There are serious amounts of fire sale or distressed assets on the market, some because other companies' balance sheets aren't in good shape, some because they have other reasons for wanting to sell assets," Mr. Williams said at a conference earlier this month. "So we're looking very closely."

Citi pegged the odds of the country's largest exploration and production company, Canadian Natural Resources Ltd., doing a big deal as low. It pointed out that CNRL is on track for a big increase in cash flow in 2017 when its Horizon oil sands expansion starts up and noted its president saying recently that the company had no gaps in its portfolio of assets.

CNRL has done deals at the bottom of markets before, however.

Cenovus Energy Inc., with its extensive oil sands and refining assets, is the most attractive potential takeover target among Canada's large-capitalization energy companies, although not for Suncor or Imperial, Citi said. It would not come cheap.

It estimates a liquidation value at $25 a share, not including contingent resources or the value of regulatory approval for future expansions with capacity of 600,000 barrels a day.

"The company's healthy balance sheet, following an equity increase and fee lands sale in [the first half of 2015], would be a deterrent to hostile takeovers," the bank said.

Meanwhile, Citi estimated that asset impairments in the Canadian oil patch due to weaker-than-expected crude prices could hit $13.2-billion this year, 11 per cent of the book value in the first half.