Suncor And Petro-Canada Merge To Create Company Worth $43.3B

Two of Canada’s oil and gas giants announced plans to weather the current economic storm by merging in a deal that creates a company with a combined market capitalization of $43.3 billion.

Suncor Energy Inc. and Petro-Canada released details of the merger on Monday, saying the deal would help both companies save a total of $300 million at a time when Alberta’s oilpatch grapples with tough economic conditions.

Under the terms of the agreement, the new company will operate and trade under the Suncor name with existing Petro-Canada shareholders holding a 40 per cent stake in the venture. Current Suncor shareholders receive a share in the new venture for each Suncor share they own, while investors who own Petro-Canada stock will receive 1.28 shares of the new company for each share they hold.

The deal values Petro-Canada at $19.18 billion based on Friday’s closing prices on the Toronto Stock Exchange. The new corporation boasts 7.5 billion barrels of oil equivalent per day in proved and probable reserves, the two companies said.

“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” said Rick George, Suncor’s current chief executive and prospective head of the joint venture. “The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada’s east coast and internationally.”

The deal, which is subject to regulatory and shareholder approval, is slated to close in the third quarter of 2009.

The companies said the merged corporation will continue to be bound by the Petro-Canada Public Participation Act, a piece of federal legislation that prohibited any group from holding more than 20 per cent of voting shares in the former Crown corporation. In accordance with the act, the new company will be based in Calgary, where headquarters for both Suncor and Petro-Canada are currently located.

Monday’s announcement marks the creation of one of Canada’s largest oil and gas companies, though the merged entity will be smaller than other global heavyweights such as Exxon Mobile and ConocoPhillips, which boast market capitalizations of US$326.6 billion and US$55.97 billion respectively.

However, the takeover of Petro-Canada means the death of a private company first created as a Crown corporation by Pierre Trudeau’s Liberal government in the 1970s to assert Canadian control over the country’s energy sector.

The deal comes weeks after the Ontario Teachers Pension Plan, which holds a 3.3 per cent stake in Petro-Canada, launched action aimed at increasing shareholder value in the company. Reports said the province’s largest pension fund was pushing for restructuring at the oil and gas firm.

Suncor and Petro-Canada are among the many Canadian energy firms to put off building massive oilsands projects due to languishing commodity prices and rattled financial markets.

Analysts say a fully integrated oilsands project, in which the oil is both extracted and processed, need oil prices of anywhere from US$75 to US$100 per barrel to be economically viable. Crude prices were trading at more than US$52 early Monday, but have been much lower in recent months.

George said in January that two of the company’s major oilsands projects would be put into “safe mode” for the time being.

Phases 3 through 6 of its steam-assisted gravity drainage Firebag oilsands project have been shelved, as have plans to build an upgrader to process bitumen from its Voyageur mine into refinery-ready synthetic crude oil.

Suncor shares fell more than seven per cent on the Toronto Stock Exchange Friday, closing at $30.90. Petro-Canada shares slid four per cent to $29.65.