Suncor Starting Oil Merger Trend?

Calgary-based Suncor Energy (SU) is acquiring its hometown rival PetroCanada (PCZ) in an all-stock $18 billion deal, including the assumption of about $3 billion in PCZ debt. The boards of both companies have approved the transaction, which will require shareholder and regulatory approvals before completion. The deal is expected to close in the 3rd quarter of this year.

PetroCanada shareholders will receive 1.28 Suncor shares for each PCZ share they own. This would represent a roughly 25% premium to the 30-day average PCZ trading price. On completion of the transaction, Suncor shareholders will own roughly 60% of the combined company, while current PetroCanada holders will own the rest.

Suncor is a pure-play oil sands operator, with approximately 87% of its total 2008 production coming from the oil sands. PetroCanada is a far more diversified player, with only about 14% of last year’s total production coming from the oil sands, though it does have a number of ongoing development projects in the area. In terms of oil and gas production and refining capacity, PetroCanada is the bigger operator. The two companies expect annual synergies of around C$300. They also expect to achieve annual capital efficiencies of around C$1 billion through elimination of redundant spending.

It remains to be seen if this deal is the start of the long expected consolidation in the energy space. The outlook for the oil sands soured following the sharp drop in oil prices. This deal puts a positive spotlight on this critical energy resource. EnCana (ECA) had earlier been mulling the separation of its oil sands business as a standalone entity. Aside from the majors, other operators with sizable oil sands assets include Canadian Natural (CNQ) and Marathon (MRO).

What is interesting is the exclusive use of stock as the acquisition currency. This could be a sign of the times given cash’s exalted status and the still-constrained credit environment.

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