Suncor Energy Inc will acquire Petro-Canada for 19.12 billion Canadian dollars (US$15.5 billion), uniting two of Canada's biggest oil companies as the nation's energy industry retrenches.
If the deal announced on Monday is approved, the combined company would be the largest oil company in Canada and have a market capitalization of about CA$48 billion (US$38 billion.) That's much smaller than global heavyweights such as Exxon Mobil and ConocoPhillips, which boast market capitalizations of US$326.6 billion and US$55.97 billion respectively, but the company would have some of the same benefits of scale.
The companies said they could save CA$300 million (US$244 million) in operating costs and CA$1 billion (US$812 million) in capital efficiencies each year.
"We're in a period here where financial uncertainty is very high on a worldwide basis. We have big time volatility of commodity prices and there's no assurance of where we go from here," said Rick George, president and chief executive officer of Suncor, who will continue in those roles in the new company.
"The super majors, particularly Exxon and Shell, can invest through the bottom part of the cycle and are improving their positions in Canada. We at Suncor have two options. We can pull back, which we obviously did on a capital basis, or we do something that would really strengthen our position and allow us to come out of this cycle stronger than ever," he said. Suncor reported a fourth quarter loss in January, the first in its history.
Analysts say oil prices need to between US$75 and US$100 per barrel to be make new oil sands projects economically viable. Crude prices were trading at more than US$52 early Monday, but have been much lower in recent months. "We're going to invest in the lowest risk, highest return capital projects," George said.
Petro-Canada's portfolio spans Canada and the globe, with assets in the oil sands, offshore on Canada's East Coast, Libya, the North Sea and elsewhere. By contrast, Suncor, the oldest and second-largest oilsands operator, has the bulk of its activities centered on the oil sands.
Petro-Canada shares jumped nearly 28 percent, or $6.68, to $30.69 on the New York Stock Exchange. Suncor shares rose 61 cents to $25.90.
Petro-Canada common shareholders would receive 1.28 common shares of the expanded company for each share of Petro-Canada, while Suncor shareholders will receive new shares on a one-for-one basis. The share exchange represents a 25 percent premium for Petro-Canada shares, based on a 30-day weighted average of the share price.
Based on the closing price Friday, the deal values Petro-Canada at CA$19.12 billion (US$15.5 billion). Petro-Canada shareholders will hold 40 percent of the enlarged company and Suncor shareholders will hold 60 percent. Both companies are based in Calgary. The deal is subject to approval by shareholders of both companies and government agencies.
"It's a made in Canada response to the challenges presented by global market uncertainty today," said Ron Brenneman, president and chief executive officer of Petro-Canada who will become executive vice chairman in the merged company.
"This new entity will be the largest energy company in Canada and will take its place on the global stage as one of the largest independent energy companies in the world," Brenneman said. George said the two companies explored a merger nine years ago but that it wasn't a fit at the time.
Edward Jones analyst Lanny Pendill said he had expected a major international firm to scoop up either company, and that the merger came as a surprise.
"It does create a supermajor up in Canada. I think it definitely increases the competitive strength of the combined company, particularly in light of today's more challenging environment," he said. "It does improve their financial position and adds flexibility."
Suncor was founded in 1953. The takeover of Petro-Canada signals the end of an integrated oil company first created by former prime minister's Pierre Trudeau's Liberal government in the 1970s to assert Canadian control over the country's energy sector.
Industry officials estimate the oil sands in northern Alberta could yield as much as 175 billion barrels of oil, making Canada second only to Saudi Arabia in crude oil reserves.