Battle Over Canadian Oil Sands Hinges on Crude Price

  • WTI that almost hit $50 in week of bid has hovered near $40
  • OPEC seen sticking to strategy of letting price sink

Suncor’s bid for Canadian Oil Sands comes down to one number: the price of a barrel of oil.

With shareholders holding out for a better offer than a quarter of a share in Canada’s largest crude producer for each of Canadian Oil Sands, the price of oil may make them think twice. The bigger suitor is better positioned to endure a prolonged market slump, so as crude teeters near $40, Suncor’s offer looks more attractive, said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co.

“Oil price changes the sentiment,” he said. “Canadian Oil Sands is going to have to be realistic.”

The U.S. crude benchmark -- which was trading above $45 a barrel when Suncor made its offer in early October and approached $50 later that week -- has been languishing 60 percent below its 2014 peak. The world remains awash with oil as OPEC continues to pump above its quota, while U.S. stockpiles rose for a ninth week. West Texas Intermediate for January delivery closed at $43.04 a barrel on the New York Mercantile Exchange on Wednesday.

Poison Pill

While Canadian Oil Sands said it’s meeting other potential bidders, Suncor’s C$4.5 billion hostile takeover offer expiring Dec. 4 remains the only one on the table. The Alberta Securities Commission will hear a plea by Suncor in Calgary on Thursday to strike down a so-called poison pill adopted by Canadian Oil Sands last month that imposes a longer period for shareholders to accept an offer than the time given by Suncor.

Beyond the Alberta hearing, the fate of Canadian Oil Sands may be decided elsewhere.

In the latest sign that the Organization of Petroleum Exporting Countries has abandoned its traditional role of defending prices, the group is accepting the return of Indonesia, a net oil importer whose economy benefits from cheap oil. In a Dec. 4 meeting of its ministers in Vienna, the cartel is expected to press on with its strategy to batter rival producers by letting prices sink to defend market share, according to 30 analysts and traders surveyed by Bloomberg.

CEO Views

That matches Suncor Chief Executive Officer Steve Williams’ outlook that oil will stay “lower for longer,” favoring holdings in companies like his that are bigger and more diversified. Canadian Oil Sands Chief Executive Officer Ryan Kubik disputes that view.

“Canadian Oil Sands is demonstrating its ability to weather this period of low oil prices and even a modest improvement in oil prices will generate robust expansion of cash flow,” Kubik said in an e-mailed response to questions. Shareholders have “stuck with us as the market has cycled down; they deserve to benefit from a lower-cost business and recovery in the price of oil in a way Suncor can’t provide.”

OPEC’s strategy has led oil producers to cut more than 250,000 jobs globally and reduce capital spending by over $100 billion as they reel from the oil slump.

Canadian Oil Sands “management are being complete lunatics by telling their shareholders not to do this deal,” said Rafi Tamazian, a Calgary-based fund manager at Canoe Financial LP that sold its Canadian Oil Sands shares after they began trading above Suncor’s offer in October. “They’re grabbing at straws.”

While Canadian Oil Sands says it’s able to withstand the rout, the producer cut its dividend 86 percent this year, the most since 1998, and its shares have plunged 64 percent since oil started declining from its peak in June of last year.

Suncor made two slight increases to its payout to investors this year, and its shares are down 21 percent over the same period. It plans to increase capital spending to as much as C$7.3 billion next year. The company has no plans of raising its bid, Williams said.

“My shareholders are saying, ‘Don’t chase, don’t overvalue any of the options you’re looking at, Steve. You have a long list of projects you can do and a long list of companies that could be a fit with Suncor. Take your time,” he said.

(Corrects currency to Canadian dollars in fifth paragraph of story published Nov. 26.)
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