Suncor: Ripe for a Takeover?

Back in the summer of 2008 (which seems so long ago!), it seemed like everyone couldn't get enough of the Canadian Oil Sands. Even the billionaire duo of Gates and Buffett went up to meet with fellow billionaire Murray Edwards (from Canadian Natural Resources) for a look. Amazing what 6 months can do!

Like much of the new oil that is expected to come onto the market over the next few years, the Oil Sands is more expensive to produce than conventional oil (and much, much more expensive than oil from Saudi Arabia). This has made its production undesirable during this downturn, and has led to the cancellation or delays of many key projects. However, this extra cost does bring one nice feature, namely that everyone knows where it is, so there is no exploration risk.

Late last spring, Suncor (SU) touched a high of just shy of $75US. Now, the company's stock can be had for less than $20, after touching a low of $15 in November 2008. So....is it an attractive time for a take-over?

Suncor has some very strong assets that would make it a great takeover candidate, including:

1. Current product of over 200K barrels/day equivalent, with future expansion available over the next few years. It did, however, temporarily shelve the construction of its Voyageur project expansion.
2. A decent long-term royalty deal with the Alberta government.
3. Some downstream/marketing assets (500 service stations in Eastern Canada).
4. Long asset life (over 30 years).

Suncor has a market cap (as of today) of about $23B US and has always been the "Safe" choice for Foreign investors who wanted to invest in the Canadian Oil Patch. However, at that price, ExxonMobil (XOM) could easily pick this one up strictly off of the cash that it has on its balance sheet, and have money to spare.

With the difficulty that many large oil companies are having in replacing their production, I'd be surprised if someone didn't take a run at Suncor if the price stayed this low for too long. It had better act soon, though, as Suncor tends to have a very high beta to the price of crude.

Disclosure -- No current position in Exxon or Suncor, although both are significant customers in the company that I work for.

Comments

[longoil:]

Both SU and COSWF are definitely long term plays.

Cheap Saudi oil will not last forever and they have been using last ditch measures such as water injection for years to recover the remaining oil. According to experts, Saudi and other ME producers will be seeing steep production declines within the next decade. Mexico and Great Britian are both one year away from becoming net oil importers. Therefore, large non-conventional plays like the oil sands will be very valuable assets to hold onto.

Jan 27 08:32 AM

[Steve Ward:]

XOM probably won't pick up SU. It owns a majority chunK of IMO and has plenty of exposure to oil sands with current and future IMOL projects.
In fact all the majors are halting or stopping oil sand projects.
Majors want conventional oil and gas projects and want them cheap.
BG, Tullow Oil, Woodside, Santos, Nexen. These are the ones the majors are looking at.

Jan 27 08:35 AM

[yank:]

Agree that SU represents a great buying opportunity. Consider the following:

1. North Sea oil production is declining precipitiously.
2. Alaskan Slope production is also falling off a cliff. Right now the West coast depends very heavily on Alaskan oil production. How will this be replaced? Based on reserve life, geography, infrastructure investment, and other factors, the oil sands is the only answer to filling the vacuum left by dwindling Alaskan production.
3. Mexico is expected to become a net oil IMPORTER by the year 2012 based on the collapse of production at its Cantarell field.

The bottom line is that the first poster noted above is correct. SU and COSWF are the only ones operating in the oil sands that have the most favorable royalty rates, best recovery technology, and most aggressive cost control programs. SU @$20 is basically a gift. It will be an easy "double" in return for 2009. Guaranteed.

Jan 27 10:07 AM

[Larry Belle...:]

Thanks for reading, everyone, and for your comments.

I do agree that Exxon is not likely to take over SU, I probably should have made it more clear. My point was more to show how small Suncor is, when compared to Exxon, in that Exxon could buy it with "spare cash". I do think there are a lot of likely suitors in this space (notice the take-over news of Total, with regards to UTS).

I think I may take my own advice and go out and buy some SU!

Cheers
Larry

Jan 27 10:09 PM

[Randy Brawn:]

The truth is that all oil sands can be easily recovered more economically than is currently been done. This can be done today. This can be accomplished using a sound environmental process (as in not creating tailings ponds). Large amounts of energy (as in gas) would not be required since heat is not required as part of the process. Water usage would be dramatically reduced and recycled. Existing Alberta tailing ponds can be cleaned up (as in recover the water, compact clean clays, and recover any remaining bitumen).

Jan 28 11:40 AM