2009-03-31-2009-03-23

To buy company with operations in Western Canada, U.S. Rockies, North Sea, Libya, Syria, Trinidad & Tobago, gaining 418,400 BOE/d, 2.35 BOE 2P.

Two of Canada's largest integrated energy companies will combine as oil-sands explorer Suncor Energy Inc., Calgary, (NYSE; Toronto: SU) plans to acquire Calgary's Petro-Canada (NYSE: PCZ; Toronto: PCA) for approximately C$19 billion (US$15.5 billion) in a stock-for-stock transaction. Including Petro-Canada's year-end 2008 debt of C$4.75 billion and C$1.45 billion of cash on hand, the total deal value is approximately C$22.5 billion (US$18.3 billion). "This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," says Suncor president and chief executive Rick George, who will hold the same role with the merged entity. "The combined portfolio boasts the largest oil-sands resource position, a strong Canadian downstream brand, solid conventional E&P assets, and low-cost production from Canada's east coast and internationally." The merged company will hold the Suncor name, while maintaining the Petro-Canada brand in refined products. Suncor is offering 1.28 common shares per Petro-Canada share. The offer is 25% more than the Petro-Canada 30-day weighted-average price. On completion, Suncor shareholders will own approximately 60% of the merged company. Petro-Canada production for 2008 was 418,400 barrels of oil equivalent per day including 59,900 barrels from oil sands, 240,800 barrels from oil, and 706 million cubic feet of gas. Proved plus probable reserves were 2.35 billion barrels equivalent with an additional 8.9 billion equivalent contingent resources for a total 11.27 billion barrels equivalent. Refining capacity was 255,000 barrels per day. Petro-Canada's upstream operations consist of gas production in Western Canada and the U.S. Rockies; oil sands operations in northeastern Alberta; production offshore Newfoundland and Labrador; and E&P operations in the North Sea, Libya, Syria and Trinidad and Tobago. Western Canadian gas production averaged 562 million cubic feet per day in 2008. U.S. Rockies gas production averaged 103 million per day from coalbed-methane fields in the Powder River Basin and in the Denver-Julesburg Basin. The company's major oil-sands interests include a 12% ownership in the Syncrude joint venture, 100% ownership of the MacKay River in situ bitumen development, a 60% ownership in and operatorship of the proposed Fort Hills oil-sands mining project, and extensive prospective oil-sands acreage. Petro-Canada estimates it has 1.2 billion barrels of total oil-sands proved plus probable reserves and 9.5 billion barrels of total contingent and prospective oil-sands resources. Petro-Canada president and chief executive Ron Brenneman says, "The merger will be good for shareholders of both companies with reduced capital requirements, operating efficiencies and complementary integration opportunities between upstream and downstream assets. 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." Brenneman will become executive vice chairman. Pro forma, Suncor will hold approximately 7.5 billion barrels of oil equivalent of proved and probable reserves, on top of an estimated contingent resource base of approximately 19 billion barrels equivalent. Production will be approximately 680,000 barrels equivalent per day. The company will have a refining capacity of 433,000 barrels per day. Debt to capitalization will be 29.6% with a debt-to-cash-flow ratio of 1.2. Suncor's George adds, "Both Petro-Canada and Suncor have a history of innovation and pushing the frontiers of oil and gas development in Canada. Both companies have taken a leadership position in striving to develop not just resources, but also communities, the Canadian economy and our quality of life. We've both put a strong focus on people and our shared environment and, together, I expect that focus to be even stronger as we move forward." The merged company's board is expected to include eight members from Suncor's current board and four members from Petro-Canada's. John Ferguson, Suncor chairman, will serve as chairman of the merged board. The proposed merger is expected to be completed in the third-quarter 2009. The merged company 's shares will trade on both the Toronto and New York stock exchanges as SU. The break-up fee is C$300 million for either party. CIBC World Markets and Morgan Stanley are financial advisors and Blake, Cassels and Graydon LLP are legal counsel to Suncor. RBC Capital Markets and Deutsche Bank are financial advisors to Petro-Canada while Macleod Dixon LLP is legal counsel. Analysts at Tudor, Pickering, Holt & Co. Securities Inc. value the deal at a 30% premium and suggest the merger is "a sign of the times" involving no cash and targeted C$300 million in annual operating cost savings. "This deal…could signal the beginning of stock-for-stock deals in energy land." Standard & Poor's Ratings Services placed its "BBB" long-term corporate credit and senior unsecured debt ratings on Petro-Canada on CreditWatch with positive implications following the announcement. "The CreditWatch placement reflects our expectation that the combined companies' business-risk profile will strengthen meaningfully as a result of the increased diversification and possible operating efficiencies," says S&P analyst Jamie Koutsoukis. "Furthermore, as the transaction will be completed through a common share exchange, we expect the pro forma financial-risk profile to represent the sum of each company's existing financial positions, which we believe are solidly within the 'BBB' rating category." Upon the transaction's completion, the combined company would have more than 3.83 billion barrels of proven reserves; an expected average daily production exceeding 680,000 barrels of oil equivalent per day, with oil accounting for about 78% of the total average daily production; and a combined reserve-life index of more than 15 years. "Both companies bring sizable proved developed reserves, and the combination of Petro-Canada's relatively larger production with Suncor's larger proven reserve base will likely strengthen the merged company's credit profile." Additionally, "Petro-Canada's large downstream operations and greater geographic diversification when compared with Suncor, further improves the merged entity's business-risk profile." Koutsoukis expects the pro forma financial-risk profile to represent the sum of each company's existing conservative financial policies with leverage remaining below 40% and cash flow protection measures at levels within the "BBB" rating category. In addition, given the increased scale of the merged entity, the company should have greater capacity both operationally and financially to execute large-scale projects, without stressing its existing credit profile.