By Lauren Krugel, The Canadian Press
CALGARY - Suncor Energy Inc. (TSX: SU.TO) and formerly government-owned Petro-Canada (TSX: PCA.TO) are merging to create a $43.3-billion global energy giant, which executives from both firms say will thrive in the economic downturn.
The combined company, which will operate under the Suncor name, will be the largest energy company in Canada and the fifth largest in North America.
"It's a made-in-Canada response to the challenges presented by global market uncertainty today, and more importantly it's a made-in-Canada strategy to unleash the potential of these two great companies and their people in the future," Petro-Canada CEO Ron Brenneman said on a conference call with analysts Monday.
"We need to face head-on the issue of global competition in a time of economic uncertainty. In these difficult times, we believe that joining forces provides the strength we need to be a leader in value creation in an extremely competitive industry."
Petro-Canada shareholders would own 40 per cent of the new Calgary-headquartered entity, assuming a proposed share swap approved by the boards of the two companies goes through as planned.
The companies, both headquartered in Calgary, both active in the Alberta oilsands and both involved in refining and retailing, say their plan will reduce their costs by $300 million at a time when Alberta's oilpatch grapples with tough economic conditions.
Petro-Canada shares (TSX: PCA.TO) shot up nearly 24 per cent in morning trading on the Toronto Stock Exchange, rising $7.09 to C$36.74 while Suncor's stock gained five per cent, or $1.60 cents to C$32.50.
Petro-Canada's portfolio spans Canada and the globe, with assets in the oilsands, the East Coast, Libya, the North Sea and elsewhere.
By contrast, Suncor, the oldest and second-largest oilsands operator, has bulk of its activities centred around that industry.
Suncor chief executive Rick George told the conference call that the merged company would be focused on Canada and the oilsands, but that all of the assets will be evaluated.
"This will be a very disciplined approach. It will not be scattergun. But it will be a Canadian oilsands-centric type of strategy," George said.
While the combined entity will keep the Suncor name on the corporate level, Petro-Canada's brand will remain when it comes to selling refined products like gasoline and diesel.
"What we're trying to do here is take advantage of the brand value that both of these companies represent. We believe that Suncor has an excellent brand recognition in the investment community and that's why we've chosen together to go forward with the Suncor name corporately," said Brenneman.
"But we also recognize that Petro-Canada has the No. 1 brand recognition in the Canadian marketplace and so we want to take advantage of that by marketing our petroleum products jointly through the Petro-Canada brand."
Current Suncor shareholders receive a share in the new venture for each Suncor share they own, and collectively own 60 per cent, while investors who own Petro-Canada stock will receive 1.28 shares of the new company for each share they hold.
The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. The new corporation boasts 7.5 billion barrels of oil equivalent per day in proved and probable reserves, the two companies said.
The deal, which is subject to regulatory and shareholder approval, is slated to close in the third quarter of 2009.
The companies said the merged corporation will continue to be bound by the Petro-Canada Public Participation Act, a piece of federal legislation that prohibited any group from holding more than 20 per cent of voting shares in the former Crown corporation.
In accordance with the act, the new company will be based in Calgary, where headquarters for both Suncor and Petro-Canada are currently located.
The merged entity will be smaller than other global heavyweights such as Exxon Mobil (NYSE: XOM) and ConocoPhillips (NYSE: CP), which boast market capitalizations of US$326.6 billion and US$55.97 billion respectively.
However, the takeover of Petro-Canada signals the end of an integrated oil company first created by Pierre Trudeau's Liberal government in the 1970s to assert Canadian control over the country's energy sector.
The deal comes weeks after the Ontario Teachers Pension Plan, which holds a 3.3 per cent stake in Petro-Canada, launched action aimed at increasing shareholder value in the company. Reports said the province's largest pension fund was pushing for restructuring at the oil and gas firm.
Suncor and Petro-Canada are among the many Canadian energy firms to put off building massive oilsands projects due to languishing commodity prices and rattled financial markets.
Analysts say a fully integrated oilsands project, in which the oil is both extracted and processed, need oil prices of anywhere from US$75 to US$100 per barrel to be economically viable. Crude prices were trading at more than US$52 early Monday, but have been much lower in recent months.
George said in January that two of the company's major oilsands projects would be put into "safe mode" for the time being.
Phases 3 through 6 of its steam-assisted gravity drainage Firebag oilsands project have been shelved, as have plans to build an upgrader to process bitumen from its Voyageur mine into refinery-ready synthetic crude oil.
-With files from Michelle McQuigge in Toronto
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