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With Suncor and Petrocan merging, analysts look at who’s next

25 March 2009

CALGARY — With Suncor Energy Inc. (TSX:SU) set to add Petro-Canada’s (TSX:PCA) oilsands assets into its already formidable arsenal, international energy supermajors are likely looking at other Canadian oilpatch companies to bulk up their reserves.

Suncor, which already has the world’s second-largest oilsands operation, will have access to two major Petro-Canada projects after the $19-billion merger closes, as well as the former Crown corporation’s 12 per cent stake in Syncrude Canada Ltd., the multi-company partnership that is the No. 1 oilsands producer in the world.

Big international players in the oilsands like U.S.-based ExxonMobil Corp. (NYSE:XOM), through its Imperial Oil subsidiary (TSX:IMO) and France’s Total SA will likely be looking at smaller targets ripe for takeover, industry observers say.

“I think Nexen Inc. (TSX:NXY) remains a prime target for (mergers and acquisitions) activity in the oilsands space. I think you probably would have to consider Canadian Oil Sands Trust (TSX:COS.UN) as a potential target as well,” said BMO Nesbitt Burns analyst Randy Ollenberger.

Nexen, which has a 65 per cent stake in the Long Lake oilsands venture and a seven per cent stake in Syncrude, has been the subject of much takeover speculation over the past year.

Total, Royal Dutch Shell PLC (NYSE:RDS), China National Petroleum Corp. and BP PLC have all been rumoured to be courting the company.

Canadian Oil Sands Trust is the largest player in the Syncrude consortium, with the next biggest slice belonging to Imperial Oil. which runs the Northern Alberta venture and is 70 per cent owned by ExxonMobil.

“The logical acquiror in my mind would be Exxon because Imperial is already operating it” said John Stephenson, portfolio manager with First Asset Investment Management.

“They’re clearly No. 1 and they have a huge balance sheet, so doing it would be no problem whatsoever.”

Petro-Canada is the operator of the delayed Fort Hills oilsands project, with Teck Cominco Ltd. (TSX:TCK.B) and UTS Energy Corp. (TSX:UTS) evenly splitting the rest.

France’s Total has been aggressively trying to take over UTS, which faces financing issues, but its overtures so far have been spurned.

“I would guess that Suncor is going to be interested in keeping Fort Hills and I think there’s a reasonable likelihood in them being interested in having the whole thing,” said BMO’s Ollenberger.

“I suspect they’re not going to get into a bidding war with Total, so I suspect they’ll let that process play out and see what happens after their own deal gets done.”

The Fort Hills partners announced last year that the project’s cost had swelled 45 per cent over its previous estimate, and that an decision on going ahead with the mining would be delayed.

Neither Ollenberger nor Stephenson see a need for the Fort Hills upgrader, which would process the tar-like bitumen into refinery-ready synthetic crude oil, to ever get built.

After the merger, the bitumen will likely be upgraded in Suncor’s planned Voyageur upgrader, which had also been put on hold.

Petro-Canada also plans to expand its steam-assisted gravity drainage operation at MacKay River, but investment in that asset has been delayed. But that process will likely be jump-started after the merger, Stephenson said.

Unlike conventional oilsands mining, which dig up bitumen in open pit operations, oil companies using gravity drainage technology inject steam to melt the bitumen deep underground, then pump up the heavy oil with a separate collection pipeline.

It’s still up in the air whether Suncor will decide to keep Petro-Canada’s minority stake in Syncrude, the analysts say.

“Syncrude’s a great asset, so I suspect it will be a tough decision for Suncor to decide whether or not they keep it or sell it down. I guess it will depend on what sort of price they could get for it,” said Ollenberger.

On the downside, said Stephenson, it is hard to reach a consensus in a venture with so many different players, which also include ConocoPhillips (NYSE:COP), Murphy Energy Company Ltd. and Mocal Energy Ltd.

The merged Suncor-Petro-Canada company will be bound by the Petro-Canada Public Participation Act, which bars any one investor from holding more than 20 per cent of voting shares.

Suncor and Petro-Canada have said they want Ottawa to nix the act.

That would theoretically make it possible for the new $43.3-billion powerhouse to be bought out, but First Asset’s Stephenson said there are only a few players big enough to make such a move.

“I think it’s possible that they could be acquired, but I think the likelihood with their scale becomes less so, because then it becomes a major transaction, even for a supermajor,” he said, naming ExxonMobil, Royal Dutch Shell and BP as possibilities.

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