Suncor, Petro-Canada announce merger

Appealing to Canadian nationalism, Suncor Energy Inc. and Petro-Canada said Monday that a proposed merger between the two oil players wouldcreate the country's largest energy company andprovide the oil patch withprotection against potentialforeign buyouts.

"I don't know if it is a marriage made in heaven. But it is a match made in Canada," said Suncor's president andCEO Rick George in announcing the all-stock deal to createa $43 billionbehemoth.

"This will truly be a flagship Canadian corporation," he said at a Calgary news conference.

The proposed arrangement, announced Monday, would see Petro-Canada equity holders receive 1.28 shares in the new company for each Petro-Canada share, resulting in existing investors getting a 40 per cent piece of the merged entity.

The stockdeal gives Petro-Canada investors a 25 per cent premium comparedwith the share price over the past 30 days, the two companies estimated.

Suncor shareholders would own the remaining 60 per cent of the new firm.

Chopping costs

The deal also would allow the two companies to cut $1.3 billion in annual costs through reduced capital spending and jobreductions, said George and Petro-Canada president and CEO Ron Brenneman.

Although shy on exact numbers,George said some employees will lose their jobs.

As well, analysts have speculated that Suncor and Petro-Canada, both of which have extensive gas station networks, could reduce the number of outlets across Canada, saving more money.

As a result of these moves,the Suncor and Petro-Canada combination will be a more efficient player in Canada's oil patch, George said, insulating the new Canadian firm from potential foreign takeovers.

Attractive oilsands

Suncorpumps228,000 barrels of oil per day from its oilsands properties in Alberta and has another 15 billion barrels of the sticky liquid still in the ground, making the company one of Canada's largest oilsands producers.

Petro-Canada also has oilsands production and potential reserves.

Foreign countries, especially China, have expressed an interest in getting access to Canada's oilsands properties, a crude source equal to Saudi Arabia's conventional reserves but expensive to produce.

Analysts say a fully integrated oilsands project, in which the oil is both extracted and processed, needs oil prices of anywhere from $75 US to $100 per barrel to be economically viable. Crude prices nudged over the $50 mark last week, but have been much lower in recent months.

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.

The larger company will have the financial resources to move ahead with the most promisingoilsands playsavailable toSuncor and Petro-Canada.

Petro-Canada's shares benefit

The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange.

Petro-Canada's shares have traded at a perceived discount to its asset value for months, a situationBrenneman said he could not explain.

Under current law, however,no one shareholder or company canown more than 20per centof Petro-Canada's outstanding shares. That legal protectionhas historical roots, designedto always keep theformer Crown corporation in Canadian hands.

Some analysts had viewed theprovision as a factor in Petro-Canada's low stock price.

Petro-Canada's legal protection, however, probably will not halt the deal, George said.

"We did not see this [provision] as a big barrier," he said.

The deal is expected to close in the third quarter of 2009.