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Depressed Canadian oil giants ripe for takeover

Market Caps Down

Carrie Tait, Financial Post Canada

Published: Wednesday, October 15, 2008

(See hardcopy for Chart/Graph)

Andrew Barr, National Post (See hardcopy for Chart/Graph)

CALGARY – Canadian oil and gas companies are ripe for becoming merger bait -and we’re not talking about the small and medium-sized shops. The biggies — Suncor Energy Inc. (SU/TSX), En- Cana Corp. (ECA/TSX), Canadian Natural Resources Ltd. (CNQ/TSX), Talisman Energy Inc. (TLM/TSX) and Nexen Inc. (NXY/TSX) — could all be targets for the world’s super biggies.

“In case you didn’t think there was money around, the super majors have lots,” said Terry Peters, an analyst at Canaccord Adams, in a research note last week that riffed off an article in Petroleum Intelligence Weekly (PIW).

“The super majors have money, motive and opportunity and some of our larger Canadian companies appear vulnerable.”

As of June 30, 2008, Exxon Mobil Corp. (XOM/TSX), Royal Dutch Shell PLC (RDSa/NYSE), Total S. A. (TOT/NYSE), and Chevron Corp. (CVX/NYSE) collectively have about US$65-billion in cash, with more pouring into their coffers at current oil prices.

To put that number in perspective, EnCana’s market cap its now $33-billion, down 54% from its peak. Suncor’s market cap is now $26-billion; Canadian Natural’s market cap totals $29-billion; and Talisman rings in at $11-billion.

Nexen, now with a market cap of $9-billion, down from $23-billion, looks like a mere grease spot compared to the war chests of super majors.

These five Canadian giants have lost an average of 57% of their market caps from their peak levels, according to Mr. Peters’ math. PIW fingered all five as potential takeover targets.

There’s precedent for mega-mergers during rough times. Between 1998 and 2001, Exxon and Mobil Corp. became one, BP PLC (BP/NYSE) made Amoco Corp. disappear, Conoco Inc. and Philips Petroleum Co. (COP/NYSE) merged, as did Chevron Corp. and Texaco Inc.

Grand total of this merger party? US$165-billion, Mr. Peters noted. That’s US$57-billion more than the combined market caps of the five potential Canadian takeover candidates.

Further, those mergers happened when some experts were calling for oil to slump to US$5 per barrel. Suddenly oil below US$100 — or US$80 or US$60 or so on — looks not so bad after all.

With sluggish economies pushing down oil and gas prices, the world’s largest energy companies need to focus on “fundamental production and reserve growth,” rather than simply riding high on energy prices. As a result, the oil sands could well suit the fancy of the international powerhouses.

“The emphasis of Suncor and Canadian Natural, and to a lesser extent EnCana and Nexen, on the oil sands business would certainly fit with the notion of a long-term supply of reserves, production and cash flow,” Mr. Peters said in his research note.

The weakening Canadian dollar helps, too. Enter Suncor and its Canadian cousins — or perhaps it’s exit Suncor and all the others.

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