(Updates with additional quotes and details)
By Steve Gelsi
Suncor Energy Inc. (SU) said Monday it will acquire Petro-Canada
(PCZ) for about $15 billion in stock as the two oil-sands companies
bulk up to cut costs in the face of lower oil prices and a slowing
world economy.
The deal, valued at $18 billion including about $3 billion in
Petro-Canada debt, would create the biggest energy company based in
Canada and one of the largest in the world in the most vast
reservoir of crude oil on the earth outside Saudi Arabia, the
companies said.
Petro-Canada's stockholders will receive 1.28 Suncor shares for
each of their shares. Based on Friday's closing prices for the
shares, Petro-Canada (PCZ) will be bought for the equivalent of
$30.73 a share.
U.S.-listed shares of Petro-Canada soared 25% to $30.08 in early
action, while Suncor also traded higher, rising nearly 5% to
$26.45. Both stocks are off more than 60% from their 52-week highs,
reached last May.
The boards of both companies have approved terms of the deal,
which requires approvals from shareholders and regulators.
Together, the companies have "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," said Rick George,
currently president and chief executive of Suncor.
On a conference call with analysts, George cited moves by
competitors such as Royal Dutch Shell (RDSA) and Exxon Mobil Corp.
(XOM) to invest in oil sands during the current down cycle and the
need for the combined company to do the same.
"We need to face head on the issue of global competition in a
time of economic uncertainty," Petro-Canada CEO Ron Brenneman said.
"Joining forces creates the strength we need...in an extremely
competitive atmosphere."
As oil prices have fallen, analysts have been predicting a wave
of energy-industry mergers.
The dramatic retreat in oil prices since last year has hurt the
cash positions of smaller companies, and tight credit has made
finding financing for big deals difficult for even well-capitalized
companies.
The companies expect the merger to produce $300 million of
annual cost savings.
Analysts at Houston-based energy research firm Tudor Pickering
said other energy companies may also opt to use their equity
instead of sorely-needed cash to get bigger.
"Is it the beginning of a stock-for-stock trend?" Tudor
Pickering Holt noted. "Sign of the times with no cash and targeted
$300 million annual operating cost savings ...Watch market reaction
to this deal as this could signal the beginning of stock-for-stock
deals in energy"
Suncor's George will take the posts of president and CEO at the
combined firm; Suncor Chairman John Ferguson will head the new
board.
The new company will be held 60% by Suncor's holders and 40% by
Petro-Canada's.
Closing, which the companies have targeted in the third quarter,
is subject to approval by holders of both companies and to
conditions including court and regulatory clearance.
Suncor was advised by CIBC World Markets and Morgan Stanley,
while Petro-Canada retained RBC Capital Markets and Deutsche Bank
as advisers.
The merge could pressure other major players in the Canadian oil
sands including EnCana Corp. (ECA), Canadian Natural Resources
(CNQ), Chevron (CVX), ConocoPhillips (COP) and Opti Canada .
The Suncor deal marks the fifth-largest global merger and
acquisition transaction this year to date, according to
Dealogic.
It's also the sixth-largest Canada-targed transaction on record
and the 10th-largest oil and gas targeted merger and acquisition on
record.
It's the largest energy-sector deal since the Dec. 18, 2006
merger of Norsk Hydro and Statoil ASA to create Statoil Hydro
(STO), valued at $30 billion.
Targeted merger and acquisition activity in the oil and gas
sector now totals $33.5 billion so far in 2009, down 29% from the
$47.4 billion recorded this time a year ago.
-Steve Gelsi; 415-439-6400; AskNewswires@dowjones.com