Suncor Buying Petro-Canada For $15 Billion, Consolidating Canadian Energy Industry

Suncor Energy Inc. (SU) said it will buy rival Petro-Canada (PCZ) for $14.9 billion (C$18.43 billion) in a deal that will create Canadia’s largest energy company, with a refining capacity of 433,000 barrels per day.

More importantly for the future of both companies, the combined portfolio boasts the largest oil-sands resource position, a vital but difficult source to mine.

“It’s a good opportunity for Suncor to snap up some good assets at fairly depressed prices,” Greg Smith, managing director of London-based investment adviser Fat Prophets U.K. Ltd., told Bloomberg. “Oil sands are the legitimate solution to the long-term energy problem but it’s a lot more costly to get the oil out of the ground.”

The merged company will also feature:

• A resource base with approximately 7.5 billion barrels of oil equivalent (boe) of proved (developed and undeveloped) and probable reserves, on top of an estimated contingent resource base of approximately 19 billion boe.
• A Strong cash flow from current crude oil and natural gas production of approximately 680,000 boe per day.
• A position in every major oil development project on Canada’s East Coast.
• Low-cost international crude oil and natural gas production from the North Sea, North Africa and Latin America.
• A strong Canadian retail brand.

Also, Suncor expects the merger to save $1.3 billion through the elimination of redundant spending and by targeting capital budgets on high-return, near-term projects.

“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” Rick George, President and Chief Executive Officer of Suncor, said in a news release. “The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada’s east coast and internationally.”

Ron Brenneman, Petro-Canada’s president and chief executive officer, said the merger reduces capital requirements, increases operating efficiencies and integrates already complimentary company operations.

“The increased scale provides more stability in volatile markets, plus the financial and organizational capability to successfully take on large-scale projects in the future,” said Brenneman, who will take the role of executive vice chairman in the merged company.

The all-share deal values Petro-Canada shares at a 25% premium, and gives Petro-Canada shareholders 1.28 common shares of Suncor for every share they own. Shareholders of both companies have to approve the merger, and both companies expect the merger will be completed in the third quarter.

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