Canadian Oil Sands (TSX: COS) Investors Getting a Fair Deal from Suncor Energy (SU)?

Alex Cutulenco | Ubika Research Analyst | January 19, 2016: The nasty feud between Canadian Oil Sands and Suncor Energy appears to be over. With COS’ Board of Directors agreeing to a sweetened takeover offer, some shareholders are likely wondering whether the Company could have gotten more.

suncor-logoSuncor Energy Inc. (TSX: SU) Monday announced that it has raised its tender offer to an exchange ratio of 0.28 of a Suncor share for each Canadian Oil Sands Limited (TSX: COS) share, from its previous 0.25 exchange ratio offer. The new offer implies an Equity Value of COS shares of $4.1 billion, with COS’s board being more acceptant to the amended offer, and urging shareholders to proceed with the tender.

So what exactly is Suncor buying? Close to $2.6 billion in LTM revenue, with $71 million in operating profit. COS operates one flagship asset – Syncrude – one of the world’s largest producers of synthetic crude oil in the Athabasca Basin. The Company produced a little more than 90,000 bpd in 2015, experiencing production drops over the last three years.

Figure 1: COS Annual Production vs. Production Guidance

Source: COS Disclosures

Suncor is betting on the long-term prospects for oil prices, as operations at the Syncrude deposit will only be cash-flow positive with WTI above US$39/bbl (Syncrude is forecasted to incur roughly US$25/bbl in operating costs over the next four years, spending US$423 million in Capex). The deal, then, is good for both parties because with current WTI prices COS is bound to run operational losses. If the losses continue, COS as a standalone entity would likely encounter liquidity problems, which would put its current dividend payout in jeopardy.

Collectively, the new entity would form a strongly-positioned balance sheet, combining asset bases to over C$90 billion, with just under $12 billion in total debt. COS has the intent of repaying $1 billion in debt over the next five years, which will hamper it financially if the low oil price environment persists. The repayment will eat into the Company’s already negative cash flow position, and diminish any likelihood of increased dividends to shareholders.

Lastly, COS’ stock price rose sharply after the amended offer, jumping 12% in mid-day trading, and up 35% since the original offer. If history is any indicator, COS shareholders stand to lose that share price increase (and more), if Suncor’s offer is rescinded.

Figure 2: Recent history has seen share prices fall sharply after offers were withdrawn

Source: Suncor offer for Canadian Oil Sands Presentation (January 5, 2016)

For COS shareholders, this might prove to be a great exit point out of the low-priced oil environment, and with the COS Board’s approval, the transaction is likely to close.

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