Suncor Energy Inc. reached a deal to acquire rival Canadian Oil Sands Ltd. with a richer offer, putting it on track to hold the largest stake in one of the industry's most troubled operations.
Suncor on Monday said the two companies agreed to a revised $4.2-billion deal equivalent to 0.28 of one of its shares for each Canadian Oil Sands share, ending a public feud between the partners in the Syncrude Canada Ltd. mining and upgrading project. Suncor also lowered the threshold of support needed for the deal to go through to 51 per cent from 66.7 per cent previously.
The détente inches Suncor closer to securing an additional 37-per-cent interest in Syncrude, a project with a history of mechanical breakdowns and missed production targets that ranks as one of the sector's most expensive to operate. Suncor currently owns 12 per cent of the venture.
For months, chief executive officer Steve Williams has insisted the company can leverage its financial heft and deep experience running complex mining projects to boost reliability and wring cost savings from the aging Syncrude plant.
But those efforts now face headwinds from crude prices that have slumped to below $30 (U.S.) a barrel, as well as a management structure led by Imperial Oil Ltd. that analysts say has hampered attempts to improve the asset's performance to date.
"The accretion from this offer for Suncor shareholders is directly contingent on Suncor and Imperial being able to improve the reliability of operations – no question about it," said Nick Lupick, an analyst at AltaCorp Capital Inc. in Calgary.
Suncor extended an olive branch early last week to the target's board after its previous offer of one-quarter of one of its shares for each Canadian Oil Sands share failed to garner the necessary support, said a person familiar with the negotiations.
It now stands poised to acquire a bigger chunk of Syncrude just as the industry reels from U.S. crude prices that have buckled to their lowest level in more than a decade.
West Texas intermediate oil on Monday traded at around $29 a barrel, although U.S. trading volumes were thin because of the Martin Luther King Jr. Day holiday.
Western Canadian Select oil sands crude fetched about $14 less than that, and several analysts have warned that prices could weaken further as Iran seeks to ramp up output to pre-sanction levels.
Syncrude, a joint venture with Imperial, Mocal Energy Ltd., Murphy Oil Co., Nexen Energy ULC and China Petroleum & Chemical Corp., has suffered from years of technical mishaps, leading to missed output forecasts and higher costs.
Mr. Williams says Suncor overcame similar problems at its own operations during the past decade and insists a bigger stake in the project would enable him to devote more resources to Syncrude.
"These are difficult issues and we are confident that we can help address them with Imperial," he said in a recent interview.
Even so, Suncor has pegged the plant's per-barrel operating costs at between $38 and $45 (Canadian), among the industry's highest. By contrast, Suncor is targeting operating costs of $27 to $30 a barrel at its own operations this year.
Meanwhile, production at the 1970s-era mine is languishing at a decade low of 248,300 barrels a day, well under its capacity of 350,000.
In December, Canadian Oil Sands shut down a processing unit to complete maintenance several months ahead of schedule, a move Mr. Williams dubbed an "emergency shutdown."
Some analysts had questioned the wisdom of deepening exposure to the asset given its patchy performance, although others said the project could benefit from its proximity to Suncor's operations.
"If you're able to, in some way, integrate the two facilities to the extent where Suncor can provide feedstock to Syncrude in the event that something happens, you should expect some kind of improvement in reliability," Mr. Lupick said.
The revised Suncor offer expires Feb. 5 and is subject to conditions, including a $130-million break fee. Under the deal, Suncor would also assume $2.4-billion in Canadian Oil Sands debt.
With a file from reporter Jeffrey Jones in Calgary.