Sean Mason | October 20, 2015 | SmallCapPower
Canadian Oil Sands Ltd. advised its shareholders on October 19, 2015 to reject a hostile takeover offer by Suncor Energy. Given the gloomy outlook for WTI crude oil, though, COS shouldn’t be too quick to reject any potential suitors.
At stake is a large ownership interest in Syncrude, Canada’s largest synthetic crude oil project. Canadian Oil Sands has a 37% holding in the project and if Suncor is successful with its takeover it will own nearly half (49%) of Syncrude.
According to a Globe and Mail report, Suncor’s bid seeks to take advantage of Suncor’s insider knowledge of cost-reduction and value-enhancing initiative under way at Syncrude, a contention levelled by Canadian Oil Sands’ management.
The Canadian Energy Research Institute, in a study released in August of this year, estimate the WTI equivalent supply costs, after adjusting for blending and transportation, at Cushing for SAGD oil sands projects at US$80.06/bbl. Thus, if Wall Street analysts are correct and we see sub-US$60 per barrel crude prices though the end of 2016, then companies such as Canadian Oil Sands will continue to struggle.
Taking the Suncor offer could be tempting to many Canadian Oil Sands shareholders. During the past five years (to October 2, 2015), Suncor has delivered total shareholder returns (including dividends) of 15%, compared with a loss of 69% for long-time COS investors. Suncor has also delivered 13 years of consecutive annual dividend increases.
Hopes for better offer could come from a ‘white knight’, and Imperial Oil Ltd. (TSX: IMO) tops the list as it owns 25% of Syncrude. Canadian Oil Sands CEO Ryan Kubik, however, told Reuters that there is interest from a broad range of buyers. “Whether it be private equity, whether it be pension funds, or international oil companies. There aren’t too many places in the world where you can go get 1.6 billion barrels of reserves and clear visibility on it,” he said.
Don’t expect Suncor to bow out anytime soon though. Regardless, given the still gloomy oil price outlook Canadian Oil Sands shouldn’t be too quick to reject any potential suitors.
