Suncor's Petro-Canada bid may spur more deals

By Scott Haggett - Analysis

CALGARY, Alberta (Reuters) - Suncor Energy's deal to buy rival Petro-Canada for shares worth C$18.4 billion ($14.9 billion) will create a dominant player in the Canadian oil sands and may spur a consolidation wave as rivals try to match the cost savings Suncor hopes for.

In the largest-ever Canadian energy takeover deal, Suncor will become the No. 1 oil company in Canada if shareholders and regulators approve the transaction, announced on Monday.

The expanded Suncor expects to save C$1.3 billion a year by reducing cost overlaps and by winnowing down the two companies' lists of capital projects, a crucial factor given that both Suncor and Petro-Canada have had to mothball projects in the hard-to-develop oil sands of northern Alberta due to plunging oil prices and rising costs.

Petro-Canada expects the deal will shave costs at its planned Fort Hills oil sands mine -- one of the C$90 billion in oil sands projects that have been deferred, delayed or canceled outright due to the fall in oil prices.

The new company may also downscale plans for a C$2 billion pipeline to serve Fort Hills and delay building an upgrader to convert mined bitumen from the oil sands into refinery-ready synthetic crude.

Such cost savings and the sheer bulk of the merged company may force rivals to consider deals of their own.

"It makes a company with a lot of critical mass," John Richels, president of Devon Energy Corp, told Reuters.

"A lot of people have been anticipating that there is going to be a consolidation in this industry," he said. "To some people it has been a surprise that it hasn't happened before, so maybe this deal is a natural outcome."

The pace of acquisitions among companies operating in the oil sands, the world's biggest oil reserve outside the Middle East, has been slow, even though some analysts had expected a rapid consolidation after oil prices plunged late last year.

Aside from Suncor's gambit, only one other deal is currently on the books, a hostile C$617 million bid by French major Total SA for UTS Energy Corp to gain UTS's 20 percent stake in the Fort Hills project.

With Fort Hills looking more likely to proceed because its costs may start to fall, Total may be even more interested in ensuring its offer for UTS is successful.

"This increases the likelihood of the deal getting done," Menno Hulshof, an analyst at Dundee Capital, said in a research note. "No matter how you look at things, the UTS assets are arguably now more attractive for Total."

While larger oil sands players like Exxon Mobil Corp and Royal Dutch Shell aren't likely to see any cost savings by acquiring rivals, there may be benefits for smaller players.

Canadian Natural Resources Ltd and Nexen Inc have recently opened new oil sands projects but had to put off planned expansions after oil prices tanked. Finding merger partners that could help them cut costs, bolster their balance sheets and protect their independence may be an attractive option for both firms, an analyst said.

"Is this a motivation for them to (find partners)? I think so," said Phil Skolnick, an analyst at Genuity Capital Markets.