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Suncor to Buy Oil Rival


MARCH 23, 2009

Suncor Energy Inc. plans to acquire Petro-Canada for about $15 billion in stock, uniting two of Canada’s biggest oil companies at a time of tepid world demand for crude.

A price of $15 billion represents a roughly 30% premium for Petro-Canada. The all-stock deal would allow the companies to merge while conserving cash, a sign of the pressure some oil producers face amid the plunge in crude prices since last summer. The Canadian government, which could veto the deal, has signaled its support, according to people familiar with the matter.

Both Suncor and Petro-Canada are major players in oil-sands production, a type of exploration that generally involves mining tar-like sands and converting them to usable oil. When oil prices were high, many producers scrambled to cultivate the rich oil-sand fields of the Athabasca basin in Canada’s Alberta province.

But the method is more expensive than conventional production and most such projects are uneconomic at current price levels. In November, Petro-Canada said it was delaying one project because of falling prices.

Oil-industry watchers have been predicting a wave of mergers prompted by falling oil prices, which have left many smaller companies starved for cash. Tight credit has made it difficult for even well-capitalized companies to find financing for big deals. The rapid change in oil prices has also left buyers and sellers with vastly different ideas about how much assets are worth.

As a result, many of the larger, cash-rich companies that are the most likely buyers are waiting for prices to come down. A Suncor deal with Petro-Canada could be a sign that the waiting is over.

Recent speculation has focused on giant companies such as Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell PLC, which have large cash reserves and have been struggling to find new places to drill.

Suncor and Petro-Canada, both of Calgary, Alberta, have been hit hard by falling energy prices. Both companies’ shares are down more than 60% from their 52-week highs, and both have been forced to slash spending. In December, Petro-Canada said it was cutting spending by about a third in 2009, to about $3.2 billion. Suncor had earlier announced its own one-third spending cut, to about $4.8 billion.

A deal would enable the companies to take out even more costs. Petro-Canada produces more oil than Suncor and had a larger operating profit last year, although its revenue was a bit smaller. But Petro-Canada’s share price has lagged behind that of Suncor and other Canadian producers, leading to calls from some shareholders to either sell the entire company or some of its businesses. Last month, the Ontario Teachers’ Pension Plan, which holds about 3.3% of Petro-Canada shares, said it was in talks with the company’s management and board about “creating shareholder value,” although it provided no details.

Suncor, Canada’s third-largest oil producer by market value, posted an operating profit of $4.1 billion last year on revenue of $24.3 billion. It has a net debt load of about $5.8 billion and a market value of about $23.4 billion.

Petro-Canada, which had revenue last year of about $22.2 billion and operating profit of $7 billion, is carrying about $2.7 billion in net debt on its balance sheet. Its market value as of Friday’s close on the Toronto Stock Exchange was $11.6 billion.

Suncor, founded in 1953, is the world’s second-largest oil-sands producer. The company is also involved in natural-gas production and oil refining.

Established by the Canadian government in 1975, Petro-Canada is involved in many aspects of the oil and natural-gas trade, from exploration to production and distribution. The company has operations around the world, from Canada to Trinidad and Tobago to Syria. It also operates a network of convenience stores and car washes in Canada. The government began reducing its remaining 19% in the company in 2004.

Canada’s oil sands comprise a massive 179-billion-barrel resource that makes the country’s oil reserves the world’s second largest after Saudi Arabia and the top source of imported oil for the U.S. But environmental groups in the U.S. have urged President Barack Obama to curtail such imports because the process of converting the sticky, viscous oil into usable crude releases more greenhouse gases than conventional oil production.

Write to Matthew Karnitschnig at [email protected], Dana Cimilluca at[email protected] and Ben Casselman at [email protected]

Printed in The Wall Street Journal, page B1
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