Suncor to buy Petro-Canada in deal valued at $18 billion

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Suncor to buy Petro-Canada in deal valued at $18 billion

By Steve Gelsi​

Last Update: 2:12 PM ET March 23, 2009

NEW YORK (MarketWatch) -- Suncor Energy Inc. said Monday it will acquire Petro-Canada in a deal valued at $18 billion as the two oil-sands giants bulk up to face lower oil prices and costly field development in the biggest global energy-sector merger in three years.

The deal, valued at $15 billion in Suncor stock plus about $3 billion in Petro-Canada debt, will 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) (CA:pCA) will be bought for the equivalent of $30.73 a share.

U.S.-listed shares of Petro-Canada shares soared 22% to $29.26, while Suncor (SU) (CA:SU) fell 2.6% to $24.62. Both stocks were off more than 60% from their 52-week highs, reached last May, prior to the deal.

The boards of both companies have approved terms of the deal, which requires approvals from shareholders and regulators.

Together, the Calgary-based 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.

The deal is taking place during a period of low oil prices, with the companies facing off against major players with deeper pocketbooks. While oil sands in Alberta offer vast amounts of heavy oil, extracting it involves an expensive process similar to mining.

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. See related story.

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 C$300 million of annual cost savings.

The companies have targeted a third-quarter closing for the deal. Upon completion, Suncor's existing shareholders will own about 60% of the merged entity and Petro-Canada shareholders will own the remainder.
S&P Equity Research analysts reiterated their neutral rating on Suncor but said they view the deal favorably because it will provide a stronger base to carry out higher-cost mining operations in Alberta.

Analysts at 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, while Suncor Chairman John Ferguson will head the new board.

Suncor was advised by CIBC World Markets and Morgan Stanley, while Petro-Canada used RBC Capital Markets and Deutsche Bank as advisers.

The merger could pressure other major players in Canadian oil sands including EnCana Corp. (ECA) , Canadian Natural Resources (CNQ) , Chevron Corp. (CVX) , ConocoPhillips (COP) and Opti Canada (CA:OPC) .
Suncor already ranks as the biggest producer in the oil sands as of the end of 2007 with 235,000 barrels a day, followed by Imperial Oil, which is majority owned by Exxon Mobil, with 230,000 barrels a day. Canadian Natural Resources produces 145,000 barrels a day in the No. 3 slot, followed by Royal Dutch Shell with 116,000 barrels a day.

The Suncor deal marks the fifth-largest transaction in global mergers and acquisitions so far this year, according to Dealogic.

It's also the sixth-largest Canada-targeted transaction on record and the 10th-largest oil and gas-targeted 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 M&A 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.
 
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