Suncor's Fort Hills Deal Shows Slump Hitting Oil-Sands Assets

  • Total sells stake to Suncor for less than one-third Teck value
  • Suncor payment 31% discount to Desjardins valuation estimate

Suncor Energy Inc.’s bargain on a further 10 percent stake in its Fort Hills oil-sands project shows how the energy market crash is reducing asset values in one of the most expensive places on Earth to extract crude.

Canada’s largest energy producer will pay Total SA C$310 million ($234 million) for an additional 10 percent share in the C$15 billion oil sands mine being built in northern Alberta, the companies said Monday. That’s less than a third of the value Teck Resources Ltd., another partner in the project, ascribes to its stake. Teck said its 20 percent is worth C$2.3 billion in a July release.

The deal is also 31 percent less than the C$450 million Desjardins Capital Markets assumes a 10 percent stake in Fort Hills is worth. Desjardins based its estimate on a reduced long-term U.S. oil price of $80 a barrel starting in 2017, Justin Bouchard, an analyst in Calgary, said in a phone interview.

“There are a number of headwinds for oil-sands players right now,” said Bouchard. The rout in prices adds to uncertainty around stronger climate regulations under consideration in Canada that would raise costs, he said.

The discounted price is partly because Suncor is the only only logical buyer for the stake, and isn’t a good guide to how much value the project has lost in the downturn, Bouchard said. "This highlights the challenged economics of oil sands mining projects," he wrote in a research note Monday.

Cash Advantage

Suncor has the advantage of cash to spend while crude’s 57 percent slide from last year’s peak forces other companies to sell assets. Total has a goal to divest $10 billion in assets through 2017. The Fort Hills deal allows Suncor additional clout in the venture by bumping its stake to a majority, Bouchard said.

Suncor Chief Executive Officer Steve Williams acknowledged the low valuation for the company’s acquisition in a release Monday.

“This opportunity to acquire an additional interest at a discounted price underscores Suncor’s confidence in its position within the oil sands,” Williams said.

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