Total moves again for UTS's Fort Hills oil-sands stake
French major Total looks to have succeeded in its attempt to buy UTS Energy, 18 months after its first effort
The Canadian firm is focused on the oil sands and its main asset is a stake in the delayed Fort Hills project.
The agreement, announced in early July, will see Total pay C$1.5bn ($1.43bn) to capture UTS's 20% interest in Fort Hills, which is led by Suncor. UTS's remaining assets will be transferred to a new company, called SilverBirch Energy.
For UTS's shareholders the deal looks sweet. Total's offer of C$3.08 per share is almost a 50% premium on the share price before disclosure of the deal. The new valuation is also much higher than the original price – C$0.830bn – Total sought to pay when its offer went hostile last year.
And SilverBirch gets to keep other prospective assets, too: its 50% shareholdings in Equinox and Frontier, two oil-sands leases close to the Fort Hills project, could hold as much as 2.8bn barrels of oil. UTS's partner in both projects is Teck, a Vancouver-based mining firm that also holds the remaining 20% stake in Fort Hills.
Total's shares also rose after the deal was announced, suggesting investors endorse the company's long-standing argument that dwindling opportunities elsewhere make the oil sands a growth region. On that score, Total's move brought immediate benefits: the acquisition of 0.68bn barrels of oil in the ground at a cost of C$0.65 a barrel.
Yet the hefty overall price Total is paying for the stake in Fort Hills – compared with its original offer, made when global oil prices were much weaker – will mean a reshuffling of the company's existing oil-sands assets. Total says it would like to sell a third of its 74% stake in the Joslyn mine. But that C$9bn project, which would produce 200,000 barrels a day (b/d) and include an upgrader, doesn't even have the relevant permits needed before it can proceed – and analysts say Total's enthusiasm for the development is cooling.
Last year, Total said its focus would be on Joslyn and its other oil-sands assets, which include stakes in the producing Surmont and undeveloped Northern Lights projects.
Switching its focus to Fort Hills looks strange. "We don't even know the parameters or timing around Fort Hills," says one Calgary-based analyst. Expansions to Suncor's in-situ Firebag and Mackay River projects, as well as to its Voyageur South mine, will remain that company's priority. "Fort Hills is way back in Suncor's inventory," he added. If the developers surrender their licence, they will pay C$0.5bn to the Alberta government to compensate it for loss of revenue.
It would be a surprise if it came to that. But unless Total can persuade Suncor to accelerate its plans for Fort Hills, the resource it has secured will remain in the ground for longer than the French firm would like. And given Total's newcomer status in the oil sands, any effort to persuade Suncor to shift its strategy will prove difficult. "I'd like to be in the room when Total tries," one analyst says. Total claims Fort Hill's first phase, which would produce 160,000 b/d, will be on stream by 2015-16. But Suncor has made no such claim.
Its official response to being joined by Total in Fort Hills was positive. But some in Alberta speculate that Suncor, or Teck, could yet make a counter offer for UTS.
The bigger questions about the deal are why Total moved now, and why its target remained UTS. Given its ambitions to become a significant player in the oil sands, buying (at more than twice the price it offered last year) a stake in a project that has been emblematic of cost overruns in the sector and whose progress is far from assured is risky.
And if Total believes what it says – that the region is critical to growth – the deal lacks ambition when larger producing assets may have been secured. Last year, it turned down ConocoPhillips's 9.03% stake in the oil sands' largest producer, Syncrude, which the US major sold to China's Sinopec for $4.65bn.
That deal won approval from the Canadian government last month. Total's will, too. The federal environment minister said the agreement with UTS showed the "great deal of confidence in the Canadian oil sands in the production of oil in an environmentally responsible way".
It also shows that patience pays. Total will be happy to have finally got its man. It may need to exercise the same discipline as it waits on Fort Hills – and Suncor – to convert its oil into something more valuable.