Suncor and Petro-Canada merger to create oilsands behemoth

The proposed merger of Suncor Energy (SU-T, SU-N) and Petro-Canada (PCA-T, PCZ-N) will create the largest Canadian company by market capitalization. It will also have the biggest resource footprint in the oilsands, the companies say.

The combined company — which will trade under the Suncor name and boast a market cap of $45 billion — will also hold a position in every major oil development project on the east coast of Canada and low-cost international crude oil and natural gas production from the North Sea, North Africa and Latin America.

“The merged company will have a stronger balance sheet, be able to achieve operating and capital cost synergies and have more operational capability – all of which will improve the economics of major projects,” Kelli Stevens, Petro-Canada’s communications advisor on the oilsands, wrote in an email response to questions. “Given this, we may be able to push ahead on projects that independently each company had slowed down due to the economic downturn.”

In total the two companies will have a resource base of about 7.5 billion barrels of oil equivalent (boe) of proved (developed and undeveloped) and probable reserves, in addition to an estimated contingent resource base of about 19 billion barrels of oil equivalent.

“The increased scale provides more stability in volatile markets, plus the financial and organizational capability to successfully take on large-scale projects in the future,” Ron Brenneman, president and chief executive officer of Petro-Canada, said in a press release. Brenneman will take on the role of executive vice chairman in the merged company.

The two companies estimate the merger would cut operating expenditure by $300 million a year and achieve annual capital efficiencies of about $1 billion by cutting out redundant spending and targeting capital budgets to high-return, near-term projects.

Cash flow from crude oil and natural gas production is estimated to be about 680,000 barrels of oil equivalent per day with refining capacity of 433,000 barrels per day.

Under the proposed deal, Petro-Canada shareholders would receive 1.28 common shares of the merged company for each share of Petro-Canada they own, while each Suncor shareholder will receive one share of the merged company for each share of Suncor they own.

The exchange ratio represents roughly a 25% premium for the Petro-Canada shares to their 30-day weighted-average trading price.

Under the deal, Suncor’s existing shareholders will own about 60% and Petro-Canada shareholders will own 40%.

A joint information circular and proxy statement was sent out on May 1 and a special shareholder meeting of Suncor and Petro-Canada shareholders will be held on June 4.

Lower commodity prices sent Suncor’s first quarter earnings into the red. In the three months to Mar. 31, Suncor reported a net loss of $189 million or 20¢ per share compared with net earnings of $708 million or 77¢ a share in the year-earlier quarter.

Cash flow from operations was $479 million compared with $1.16 billion in the first quarter of 2008.

Upstream production was higher, however, due to better operational efficiencies at the company’s oilsands operations as well as additional volumes processed on a fee-for-service contract for Petro-Canada.

Oilsands production contributed an average 278,000 barrels of oil equivalent per day during the first quarter, compared with 286,200 barrels of oil equivalent.

Meanwhile, work continues at two of Suncor’s capital intensive oilsands operations.

Suncor expects to complete the construction of its Firebag sulphur plant in the third quarter of the year at a cost of about $400 million. The company is also nearing completion of its Steepbank extraction plant, which is scheduled to be finished in the third quarter of the year.

In April Suncor said it had hedging agreements for about 60% of its targeted production in 2009 and for 50,000 barrels per day in 2010.