Damn the torpedoes, Suncor speeds ahead

However its contentious hostile takeover bid for Canadian Oil Sands ultimately turns out, Suncor’s decision to gear up spending and M&A expansion—buying into the market crash—has the potential to be a rued, or revered, industry gambit
By Paul Brent

Buy low, aim high: The oil patch is down, but CEO Steve Williams hopes to use Suncor’s existing strength to bulk up further at competitors’ expense

Alberta’s oil patch is viewed as a small, close-knit community, where disagreements are handled in gentlemanly fashion in the quiet confines of the Calgary Petroleum Club.

That’s a major reason why Suncor Energy Inc.’s (TSX:SU) $4.3-billion hostile bid for Syncrude partner Canadian Oil Sands (TSX:COS) caused such a stir. Rather than keeping up the united facade, Suncor took on the role of willing predator, unabashedly targeting its local industry partner at the bottom of the oil-price cycle.

At press time, having been granted a month-long extension on Suncor’s original Dec. 4 bid deadline by the Alberta Securities Commission, COS management was sticking to its position that Suncor’s bid undervalued the company, holding out hope it could extract a higher offer from Suncor or line up another white knight investor. Meanwhile, Suncor was adamant that it would not raise its price or extend the dead- line on its offer, leaving shareholders in a quandary. “It is not that often that a white knight emerges but when it does, it usually takes an average of 41 days after the initiation of the bid,” says Aaron Atkinson, a partner who specializes in mergers and acquisition with Fasken Martineau DuMoulinLLP.

A bit lost in the flurry of name-calling, poison-pill defences and square-offs with regulators, however, is the fact that, for Suncor, the COS bid is only one important move in a broader offensive. As company CEO Steve Williams has repeatedly made clear, win or lose, Suncor intends to continue full bore with a broad, deliberate strategy to bulk up in the sector while its more vulnerable competitors are down. Other acquisitions are possible, capital spending is up and new projects are being developed and brought on line.

“I wouldn’t be surprised to see them go after something even if they do end up with Canadian Oil Sands,” says Michael Dunn, director of institutional research with FirstEnergy Capital in Calgary.

Recessions and market slumps often produce great conditions for consolidators and aggregators, but they can produce their share of casualties and calamities, too. What is clear at this point is that Suncor, with its three pillars of oilsands, lower-cost offshore production and counter-cyclical refining and retailing businesses, is better positioned to thrive in a low-price crude environment than many of its potential competitors. And its board and management want to make the most of it.

The strategy driving Suncor is not that hard to figure out: get greater scale in Alberta’s oilsands, where it has been an early pioneer way back to 1967. “Really what they want is barrels to feed the refining side down the road,” says Nima Billou, an analyst at Veritas Investment Research in Toronto.

When Listed spoke to Billou in November, he was counseling Canadian Oil Sands shareholders to tender their stock. “It sort of makes sense, they don’t have to worry about where those barrels come from for 30 or 40 years.”

To date, while Suncor’s competitors’ share prices have been battered by crude’s fall to, at times, less than US$40 a barrel, its own stock has fared better thanks to its diversification. While well off 2014 highs, through November Suncor shares were trading at the same levels as this past January. Part of the reason is that Suncor’s large Petro-Canada retail network benefits from falling prices. A depressed energy economy also means cheaper build costs for its $15-billion Fort Hills oilsands project now under development.

“They will be busy,” says Martin Pelletier, a portfolio manager with Trivest Investment Counsel, who is already betting on Suncor’s next acquisition. “If this one doesn’t go through, who is going to be the next one? I won’t tell you who that is because I’m investing that way right now.”

Dunn, for his part, has fingered MEG Energy Corp. (TSX:MEG) and Cenovus Energy Inc. (TSX:CVE) as prizes. “It is possible that Suncor and or somebody else might go after those other two.” However, in an analyst conference call to discuss the company’s third quarter results at the end of October, Suncor’s Williams said buying Cenovus would not add any value to Suncor.

Along with its COS bid, Suncor also announced in mid-November that it would increase spending on major growth projects in the oilsands in 2016, in particular the Fort Hills mine under construction north of Fort McMurray. Specifically, it said it was allocating between $6.7 billion and $7.3 billion for new expenditures, compared to between $5.8 billion and $6.4 billion on the books for 2015. At the same time, the company has cut $1.4 billion from its 2015 budget and laid off 1,200 employees and said that it could adjust its 2016 spending if market conditions deteriorate further.

With oil prices still struggling, it’s hard to see how that outlook could get much bleaker. In late November, the Canadian Association of Oilwell Drilling Contractors announced that not only was the current active rig count in Western Canada at the same rock-bottom levels as during the worst years in the 1980s, but that in 2016 rig count was expected to fall further still. The association estimates 4,728 wells will be drilled in 2016, down from more than 11,200 in 2014.

Also adding to the uncertainty is the new NDP provincial government’s just-announced plans for an escalating, widespread carbon tax. But on that front, Suncor was quick to proclaim its support. The thinking here is that while the new regime might be tougher on the oil patch as a whole, bigger, better-financed energy companies will do better than smaller, weaker competitors under a new scheme.

Meanwhile, for now at least, Suncor’s dance with COS and its shareholders goes on. It’s no surprise to FirstEnergy’s Dunn: “It is our view that this current bid was not expected to get two thirds approval [of shareholders] but was a bid that would condition the shareholder base to accept a higher one.”

Photography: Dan Riedlhuber/Reuters

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