PARIS/CALGARY Total SA (TOTF.PA) agreed on Wednesday to buy UTS Energy Corp UTS.TO for C$1.5 billion ($1.42 billion), more than doubling an offer the small Canadian company spurned 18 months ago as the French major looks to boost its holdings in the Alberta oil sands.
In a bid backed by UTS's board, Total is offering C$3.08 a share for the company -- well above the initial C$1.30 hostile bid Total made in January 2009 -- when oil prices were at recent lows -- and then sweetened to C$1.75 three months later to no avail.
France's biggest oil company revisited its offer as oil prices stabilized near $75 a barrel and new oil sands investments look profitable again.
"This year we have a more stable situation," Jean-Michel Gires, president of Total's Canadian unit, said in an interview. "It's a different market environment and a different type of commitment (resulting in) a friendly deal.
UTS will spin off its stake in the Frontier and Equinox oil sands properties into a new company, SilverBirch Energy Corp, to be owned by existing shareholders.
"This transaction allows UTS shareholders to realize an immediate cash premium to UTS's current share price, while also participating in the significant growth potential of SilverBirch," UTS Chairman John Watson said in a statement.
Total said the acquisition would strengthen its holdings in the oil sands, the largest source of crude outside the Middle East and one of the few big reserves still open to investment by the international oil companies.
Analysts said the price was fair, with some pointing that the amount involved represented merely 5 percent of Total's capital expenditure budget for 2010.
"On a stand-alone basis the deal is reasonable, adding resources at a price of $0.60 a barrel, but investors may query why, if this is such an attractive asset, Total did not pursue the purchase a year ago at a lower price," Barclays said in a note.
Two years ago, competition for a limited pool of skilled labor and high raw material prices sparked an inflationary spiral that threatened to increase project costs by half.
That meant some new projects would not turn a profit unless oil was at $100 a barrel. But when oil sands investment collapsed in 2008 during the financial crisis, many projects were mothballed, lowering costs by nearly a third and making investment feasible with oil at current levels.
The UTS deal, based on a 46 percent premium to UTS's closing price on July 6, gives Total the Canadian company's prize asset, a 20 percent stake in the highly prospective Fort Hills mining project controlled by Suncor Energy Inc (SU.TO), the country's largest oil sands developer.
UTS shares rose C$1.32, or 63 percent, to C$3.43 late afternoon on the Toronto Stock Exchange as some analysts speculated that a rival offer could emerge for the junior oil sands company. It holds stakes in properties but has no active projects under development.
Suncor, which owns 60 percent of Fort Hills, has yet to decide when it will go ahead with developing the mine but welcomed its new partner.
"We're happy to have Total as a partner in the project," Sneh Seetal, a Suncor spokeswoman, said.
The company isn't expected to announce its intentions for Fort Hills, where Teck Resources Ltd TCKb.TO owns the remain interest, until late this year at the earliest.
TOTAL ADDS HEFT
Acquiring UTS adds heft to Total's already considerable oil sands investments, where it plans to spend as much as C$20 billion over the next 15 years.
That said, the costs of producing the tarry bitumen trapped in sand and clay are high, technical challenges abound and developments in the region are bitterly opposed by environmental groups concerned about rising greenhouse gas emissions and water pollution.
Undeterred, Total moved ahead earlier this year on plans to quadruple output at the Surmont oil sands project it shares with ConocoPhillips (COP.N) to 110,000 barrels a day.
It's also in the early stages of seeking regulatory approval to build the Joslyn oil sands mine beginning with an initial, 100,000-barrel-a-day phase.
The company said on Wednesday it would seek to sell a third of its 75 percent interest in the property, though it wants to stay on as operator of the project.
As well, Total has a 50 percent stake in the Northern Lights project through its acquisition of Synenco Energy, though it hasn't yet firmed up plans for the property.
Total shares on Wednesday rose 0.57 euros, or 1.6 percent, to 37.21, underperforming the European energy sector .SXEP which rose 2 percent.
Total noted it is also getting C$355 million of UTS's cash, bringing its costs for the acquisition down to C$1.15 billion.
(Additional reporting by Sakthi Prasad in Bangalore; Editing by Louise Heavens and Simon Jessop; Editing by Frank McGurty)