Suncor Energy Topples The First Domino In Canada's Energy Sector

| About: Suncor Energy (SU)

Summary

Canadian Oil Sands comes to terms on a C$6.6 billion offer from Suncor Energy Inc.

Continuing low oil prices have claimed their first major victim in Canada.

Is it time for investors to take a long look at the future of Suncor Energy Inc.?

As crude oil prices continue to hover around $30.00 per barrel many analysts and insiders have been wringing their hands waiting for the first major merger to become a reality. Finally after weeks and weeks of jockeying and negotiations Suncor Energy Inc. (NYSE:SU) has come to terms on a C$6.6 billion acquisition of Canadian Oil Sands Ltd. (OTCQX:COSWF). Now with this acquisition awaiting final approval from shareholders, investors across the board are looking to see if this new deal can turn into a tangible investment or if it will just be a drain on their portfolios.

At first glance it appears that investors of Suncor will fare better under this arrangement than those of Canadian Oil Sands. In the deal Suncor is offering 0.28 Suncor shares in return for each Canadian Oil Sands share. When the deal was announced on January 18 Suncor's shares closed on the TSX at C$29.77, which would create a value of C$8.33 (or C$8.77 based on Friday's closing price) for each Canadian Oil Sands share which would be acquired. Whereas Canadian Oil Sands saw its stock price on the TSX close on January 18 at C$8.21, a far cry from its 52 week high of C$13.87 and its five year high of C$33.73.

However. this seemingly low-ball price tag is better than the C$6.19 stock price Canadian Oil Sands closed at on October 2 right before Suncor's attempts on the company became public. Once completed this all stock acquisition is expected to have a cash value in the neighborhood of C$4.2 billion for the shares and another C$2.4 billion in debt assumptions. For investors of Canadian Oil Sands this deal is less of a payday and more of a parachute as Canadian Oil Sands with its limited portfolio of activities has become fiscally hamstrung in this current market crash in energy prices. As crude oil continues to hover around 12 year lows the bottom of Canadian Oil Sands cash reserves was beginning to become apparent, because unlike Suncor it only operated in the extraction phase of crude oil development.

Many investors of Canadian Oil Sands have viewed this acquisition as bargain hunting on Suncor's part but others see this as their only option to protect the capital they had invested in the company. This is a sentiment which has been declared by Seymour Schulich who owns 5% of Canadian Oil Sands shares who stated that "It's the best we could do in that very difficult period, because we basically since October have been fighting a 37 per cent decline in oil prices, which doesn't help negotiations".

Are the clouds parting over Suncor?

Whereas Canadian Oil Sands was limited in its operations in the energy market Suncor has been able to mitigate its losses due to its diversified portfolio of operations. With its three main branches: Oil Sands, Exploration & Production, and Refining & Marketing it has been able to stabilize itself in a way that Canadian Oil Sands wasn't able to. Just having the refining capabilities alone has made a huge difference in Suncor's ability to ride out this drop in the energy market better than some of its competitors. For Canadian Oil Sands investors considering tendering their shares, Suncor does offer them a more balanced energy company to get behind.

Yet despite all of Suncor's wheeling and dealing it is still handcuffed by the current proxy-war between Saudi Arabia and Iran which has been flooding the market with ever cheaper barrels of crude oil. For investors playing the long game the question becomes will Suncor be in a beneficial position when prices eventually normalize again?

One the of the largest benefits for Suncor from this merger will be its increased stake in Syncrude, which will increase from 12% to 49% making it the majority member of the project which produces 350,000 boe/day.


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This increased ownership comes just after (according to Canadian Oil Sands Q3 report) Syncrude was able to realize C$1 billion in overall cost savings, and following this merger Suncor should be able to make even more operational improvements to the project. However in all of the change over Imperial Oil (NYSEMKT:IMO) could be witnessing its title of primary operator in the project evaporate once Suncor grasps is new firm hold on the project.

By the numbers

Going forward we can extrapolate what the new bigger, better Suncor could look like by going over both companies recent quarterly and annual reports.

Q3 2015

Cash flow from operations

Net loss

Avg. production

Cost per barrel

Avg WTI price

Suncor

C$1.88 billion

C$376 million

566,000 boe/day

C$27.00

$46.50

COS

C$82 million

C$174 million

86,687 boe/day

C$40.49

$46.50

Click to enlarge

2014

Cash flow from operations

Net earnings

Avg. production

Suncor

C$5.4 billion

C$2.69 billion

534,000 boe/day

COS

C$1.1 billion

C$25 million

108,139 boe/day

Click to enlarge

This means that Suncor will have the capacity to generate 652,687 boe/day even at a time when production has been slowed down. This may not sound like earth shaking news while WTI prices are where they are, but come two or (dare I say) three years down the road this could turn into a great investment by Suncor.

Total eclipse of the energy market

For everyday investors there is still optimism from analyst that Suncor can turn around its stock price in the next year. Recently (post announcement) Scotiabank has adjusted its price target on Suncor's NYSE shares to $43.00 with an outperform rating. While simultaneously downgrading their 2015 EPS prediction from C$1.19 to C$0.81, overall the average price target for Suncor on the NYSE is right on the mark with Scotiabank's analysis of $43.00. This would present a huge upside from the $22.12 closing price Suncor ended last week on.

Of course any consideration for investing in oil at this point is perhaps the most undesired investment option at the moment. Yet this is where many investors have made great gains, in environments where patience is required or where it isn't the cool thing to do among investors. It is unknown what Suncor's dividend program will looking like once the deal is completed but as of now it offers a dividend of $1.16 with a yield of 3.92% and considering that Suncor's fwd p/e ratio is only 13.04 this could be a prime time to consider a long-term strategy, as long as you can bear another two or three more rough years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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