Bhaswati Mukhopadhyay, David Ljunggren and Tom Bergin, Reuters
Suncor Energy Inc has agreed to buy rival Petro-Canada to create Canada's largest oil company, as the pair seek to tackle tough conditions in the oil sands industry by slashing costs.
Suncor will pay C$18.43 billion ($14.9 billion) for PetroCanada in the all-share deal which targets $1.3 billion in savings after soaring costs and plummeting oil prices made it hard to turn a profit from squeezing crude out of tarry soil.
The deal comes after a period of missed earnings targets and a project delay at Petro-Canada and is expected to be completed in the third quarter of 2009.
Petro-Canada shareholders will receive 1.28 common shares of the merged company for each Petro-Canada share, while Suncor shareholders will get one common share of the merged company for each Suncor share.
The represents a premium of about 28 percent to the C$29.65 closing price of Petro-Canada shares on Friday, assuming there were 484.4 million Petro-Canada shares outstanding as of Dec. 31, 2008.
On completion of the deal Suncor's shareholders will own about 60 percent of the merged company, the companies said, and they expect to achieve annual operating expenditure reductions of $300 million.
They also expect to achieve annual capital efficiencies of about $1 billion through the elimination of redundant spending and targeting capital budgets on high-return, near-term projects.
"They need to cut costs," one analyst, who asked not to be named, said.
The merger will combine Petro-Canada's extensive retail gasoline and refining business and its international operations with Suncor's extensive operations in oil sands, where it is the second biggest producer behind Syncrude Canada Ltd.
Petro-Canada delayed its Fort Hills oil sands project last year because of rising costs.
Many other oil companies are also delaying oil sands projects on concerns about the industry's profitability.
Royal Dutch Shell Plc (RDSa.L), considered one of the oil sands industry's lower cost operators, said operating costs ran at around $38/barrel last year.
Taxes and capital investment costs push total costs much higher, while crude prices currently trade at around $50/barrel.
Petro-Canada has also faced pressure to boost the value of its shares, which have lagged rivals because the company's management has failed to boost production and has missed earnings targets.
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