Suncor, Petro-Canada merger approved
June 5, 2009
CAROL CHRISTIAN
Fort McMurray Today staff
Suncor Energy and Petro-Canada shareholders gave overwhelming support yesterday for the proposed merger of the two companies to become Canada's largest energy company in a deal worth $22.2 billion.
Petro-Canada shareholders were the first to approve the deal at more than 96% in favour. At a later meeting, Suncor shareholders vote 98% in favour of the merger. After the vote John Ferguson, chairman of the board, said it was a historic day for the two companies and a great day for Canada.
Suncor president Rick George predicted the merged company will be the premier Canadian energy company able to compete with “global supermajors.”
George will continue as president of the new combined entity as Suncor takes over Petro-Canada. The new company will also retain the Suncor Energy name, though the well-known Petro-Canada brand will still be a mainstay in some areas of business, such as gas stations.
Current Petro-Canada head Ron Brenneman, who is to assume the position of executive vice-chairman for the merged company, was at the Suncor meeting in the same Calgary locale as the morning Petro-Canada meeting.
Suncor shareholders are to receive one share of the new company for each common share held while Petro-Canada shareholders get 1.28 shares per common share.
However, the deal, first announced in March, still needs regulatory and Competition Bureau of Canada approval, optimistically expected between July and September.
“For these two great, great Canadian companies, joining forces makes a lot of sense for a lot of reasons. The continued strength of our position in oilsands is an obvious reason,” said George citing more than half a century of combined experience; complimentary assets on the ground; and 22 billion barrels of combined resources in the ground.
He also offered the annual general and special meeting of shareholders four other reasons: combined assets and balance sheet strength provides much greater ability to fund growth projects throughout the commodity price cycle, and the companies will not have a shortage of growth opportunities over the coming years; the merger creates “synergies” that will result in significant savings for the two companies, aiming to save $1 billion a year through capital optimization and a further $300 million per year in operating costs; with four refineries, the combined company will be able to integrate a sizeable amount of current and planned oilsands production into Suncor's own facilities; and the combined natural gas production will support a “natural hedge” against internal energy consumption, and the combined assets also provide a solid foundation for a go-forward strategy focused on building a low-cost position among North American natural gas producers.
Attributing his company's continued success to its ability to tackle the challenges and look for opportunities, George said, “Change is inevitable.”
With the oilsands operating in an overheated economy for the last half dozen years, operators have had to deal with sharply inflated material costs and a tight labour market, factors beyond operators' control, George said what companies can control is how they conduct our business.
“We now have some breathing space and the opportunity to concentrate on our core business, and we are seizing that opportunity with both hands.”
Acknowledging there's still a lot of work to do, George said the new Suncor will look a lot like the old Suncor: an integrated energy company focused on the development of the Canadian oilsands. He said the company will continue to develop a large oilsands resource base from its own mining and in-situ sources, as well as third-party supply; will proceed with staged growth of upgrading assets to produce higher value products in Canada; will integrate that production with downstream refining and marketing operations; and this core long-term strategy will be supported by natural gas, international and offshore production, as well as a growing renewable energy portfolio.
The difference, however, is that the new Suncor will be “bigger” and “stronger,” said George.
“It will be able to compete with global super-majors on many measures, and certainly here in our own backyard ... while continuing to meet the high standards of responsible development that Canadians expect both today and in the future.”
When the deal is complete, the new Suncor will step forward as the “premier Canadian energy company and a substantial player on the global stage,” he said.
“We'll have a strong potential for rateable growth, steady growth, while many of our competitors work hard just to maintain their current production.”
After closing, a detailed review of all capital projects from both companies will be held with the priority on those with the strongest near-term cash flow potential, the highest anticipated return on capital, and the lowest risk.
Using the planned third stage of Firebag is an example, George said construction of that project is already 50% complete and the economics for moving it forward remain very solid.
“When the time comes, we won't be putting pen to paper, we'll be putting boots in the ground and should have new production on line approximately 18 months from when we resume construction.”
In the meantime, Suncor is moving ahead with two capital projects: the Steepbank extraction plant, which will help improve reliability and productivity, and a sulphur plant at Firebag, which is expected to support emissions reductions for existing and future in-situ developments when completed.
Recalling that Suncor was one of the first major energy companies to adopt a climate change action plan to better manage greenhouse gas emissions and make industry-leading investments in renewable energy projects, George said the new company will continue improving environmental performance, which includes adopting a series of longer-term environmental performance goals that will be published in Suncor's sustainable-development report later this month. The goals will focus on continuing reductions of the amount of water used, improved energy efficiency and reduced air emissions, and a substantial increase in reclamation of disturbed land.
During the meeting, chief financial officer Ken Alley reviewed Suncor's financial performance over the previous year, and how the proposed merger fits into Suncor's future. Despite a major pullback in the fourth quarter as the downturn began and commodity prices followed suit, Suncor's overall numbers are strong, with the company posting solid net earnings and cash flow of $4.5 billion, he said.
Alley described 2008 as a year of high capital spending as the company laid the foundation for future growth, but at the start of 2009, there was no longer any doubt they “were in a totally different game.”
“The most visible and the most difficult capital decision this year was cutting our capital spending plan to $3 billion,” said Alley. “That might still seem like a big number, but for a large growth company like Suncor, it's a very lean budget.”
George had earlier noted that the global market turmoil that set in during the latter part of 2008 “was as sudden as it was crippling.”
“Every industry, government and individual felt the impact. The oilsands industry was no exception.”
Alley said while “prudent” might be the most overused word in business today, it's still the best word to describe Suncor's decision.
“We recognized that it was important to take a cautious approach and plan to spend within our means,” he said, adding that the cut in growth spending was mainly driven by external factors of available credit and prices at the lower end of the commodity cycle.
“It was in no way, a reassessment of our internal view of the fundamental quality of our growth plans. We believe now, as we did last year, that the economics for the various stages of Voyageur are attractive,” said Alley, adding the view is based on a long-term view of commodity prices.
During its 2008 fourth quarter teleconference in January, Suncor announced the additional cut to its budget and that the construction of the Voyageur upgrader and Firebag Stage 3 was being wound down until the expansion work begins again, though no date had been determined.
Alley resisted offering any assurance that the worst is over.
“I believe we've tested the bottom, and we remain within our budget projections. We've cut costs, not just on our capital projects but also across the board with day to day operations. We're in a stable position with existing cash generation capacity.”
Alley said Suncor's merger with Petro-Canada is a “great fit in many ways,” including Suncor's financial strategy.
“Together, the companies have a strong growth portfolio matched by a strong balance sheet, and that combination gives us the opportunity to make the right investments, at the right time with less concern about where we may be in the commodity price cycle or the condition of credit markets.”
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