March 23, 2009 / 8:46 AM / 10 years ago

Suncor to buy Petro-Canada

CALGARY, Alberta (Reuters) - Suncor Energy Inc (SU.TO) said on Monday it will buy rival Petro-Canada PCA.TO to create Canada’s biggest oil company, dominant in the Alberta oil sands and able to slash costs as it looks to weather a period of low oil prices.

Petro-Canada's Edmonton Refinery and Distribution Centre glows at dusk in Edmonton February 15, 2009. REUTERS/Dan Riedlhuber

Suncor is offering C$18.43 billion (10.26 billion pounds) for Petro-Canada in an all-share deal. That makes it the largest Canadian oil and gas takeover ever, according to Thomson Reuters data, and the biggest takeover of a Canadian company since 2007, when Rio Tinto (RIO.L) bought aluminium company Alcan for $43 billion (29.6 billion pounds).

The deal targets C$1.3 billion in annual savings for the combined company in an environment in which plummeting oil prices have made it hard to turn a profit from squeezing crude out of the oil sands in northern Alberta, the world’s biggest oil reserves outside the Middle East.

The merger of the two will create a company with 100 years worth of reserves, four refineries in Canada and the United States, a chain of retail gasoline stations and more than 680,000 barrels per day of oil and gas production.

“We now have a new integrated national champion,” said Dom Grestoni, managing partner at IG Investment Management, which holds about 6 million Petro-Canada shares and 11 million Suncor shares.

The deal comes after a period of missed earnings targets and project delays at Petro-Canada, which has been under pressure from shareholders to boost its lagging shares, which had been trading at 2003 levels.

Suncor will be able to use its new heft to further cut costs at its oil sands operations, adding Petro-Canada’s oil sands properties — including the planned Fort Hills oil sands mine — and keep growing despite low oil prices.

“We had two options,” Rick George, Suncor’s chief executive, said on a conference call. “We could pull back ... or do something that would really strengthen our position and allow us to take a look at investing and coming out of this cycle even stronger than ever.”

The merger may also let the two companies breathe new life into projects that were stalled when oil prices plunged.

Suncor, the No. 2 oil sands company behind Syncrude Canada Ltd, has delayed a 200,000 barrel per day expansion of its oil sands operations, while soaring costs have pushed Petro-Canada to delay its planned Fort Hills oil sands mining project as it sought to cut the project’s cost.

Ron Brenneman, Petro-Canada’s chief executive, said the merger could bring down the price at Fort Hills, letting the company scale back a planned pipeline for the project and use Suncor’s upgraders to convert the mined bitumen into refinery-ready synthetic crude instead of building a stand-alone facility.

“It was a real eye opener for me to see the number and quality and quantity of the opportunities we saw in putting the two companies together, particularly in the oil sands area,” Brenneman said.

Petro-Canada shareholders will receive 1.28 common shares of the merged company for each Petro-Canada share, while Suncor shareholders will get one common share of the merged company for each Suncor share.

The represents a premium of about 28 percent to the C$29.65 closing price of Petro-Canada shares on Friday, assuming there were 484.4 million Petro-Canada shares outstanding as of December 31, 2008.

Petro-Canada’s shares were up C$7.80 at C$37.45 at midday on the Toronto Stock Exchange, while Suncor rose 70 Canadian cents to C$31.60, climbing along with oil prices.

On completion of the deal, Suncor’s shareholders will own about 60 percent of the merged company, the companies said, and they expect to achieve annual operating expenditure reductions of C$300 million.

They also expect to achieve annual capital efficiencies of about C$1 billion through the elimination of redundant spending and focussing capital spending on high-return, near-term projects.

Petro-Canada had been protected from a hostile takeover by Canadian legislation that prohibited anyone from holding more than 20 percent of the former state-owned company.

Brenneman said he expects that because of the structure of the agreement, the existing legislation will now apply to the new company, which will retain the Suncor name.

Petro-Canada shares have dropped 31 percent over the past 12 months while Suncor’s stock is down 35 percent.

($1=$1.23 Canadian)

Additional reporting by Bhaswati Mukhopadhyay, David Ljunggren, Euan Rocha and Tom Bergin; Editing by Peter Galloway

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