Suncor Energy loading a truck at the Fort Hills oilsands mine in Alberta
Suncor Energy, the Canadian integrated energy company based in Calgary, Alberta, has announced that it will purchase TotalEnergies’ Canadian operations through the acquisition of TotalEnergies EP Canada Ltd for $4.5 billion.
The deal includes potential for additional payments of up to an aggregate maximum of $600 million, conditional upon Western Canadian Select benchmark pricing and certain production targets. Subject to closing, the transaction will have an effective date of April 1, 2023.
Closing of the transaction is anticipated to occur in the third quarter of 2023 and is subject to waiver of the right of first refusal on the Surmont working interest and other customary closing conditions, including receipt of all required regulatory approvals.
TotalEnergies EP Canada holds a 31.23% working interest in the Fort Hills oil sands mining project (Fort Hills) and a 50% working interest in the Surmont in situ asset. This will add 135,000 barrels per day of net bitumen production capacity and 2.1 billion barrels of proved and probable reserves to Suncor’s oil sands portfolio.
In his comments, Rich Kruger, President, and Chief Executive Officer of Suncor Energy, said that this transaction represented a major step in securing long-term bitumen supply to our Base Plant upgraders at a competitive supply cost.
“These are valuable oil sands assets that are a strategic fit for us and add long-term shareholder value. The acquisition also introduces flexibility and optionality into our long-range capital plan, providing us with further discretion in respect of the timing and scope of future oil sands developments,” Kruger added.
With the transaction, Suncor will have 100% ownership of Fort Hills, which along with the Firebag and MacKay River in situ assets, provides the company with sufficient long-life, physically integrated bitumen supply in the Fort McMurray region to fully utilize the Base Plant upgraders post the end of the Base Mine life in the mid-30s.
Surmont is a high-quality, producing asset which adds long-life production to Suncor’s oil sands portfolio that is competitive with the company’s organic development options.
The asset also has the potential for growth through cost-competitive expansion. When the Base Mine life ends in the mid-30s the bitumen production from the combination of the Fort Hills and Surmont interests will effectively replace half of the current Base Mine bitumen production. Replacement of the remaining Base Plant Mine bitumen production will involve economic decisions assessing the highest value use of capital in the future.
Debt Funding Acquisition
With Suncor’s strong balance sheet, the acquisition will be funded by debt. As a result, it is expected that net debt levels will temporarily exceed the company’s $12-15 billion target range. The company will maintain the current allocation of funds flow after dividends, capital, and non-operational benefits of 50% to debt reduction and 50% to share buybacks in line with the capital allocation framework.
Suncor expects to return to within its target net debt range in 2024 based on current expected commodity prices. The acquisition is expected to strengthen the underlying business, result in increasing funds flow and be accretive to funds flow per share.
Assuming the acquisition closes as contemplated, the Suncor Board currently intends to increase the quarterly dividend by approximately 10% following closing.
The Surmont in situ project is operated by ConocoPhillips Canada and upon closing, each of Suncor and ConocoPhillips Canada will hold a 50% working interest. Under the terms of the Surmont joint venture arrangements ConocoPhillips Canada has certain pre-emptive rights including a right of first refusal on the 50% Surmont working interest.
The addition of these assets to Suncor’s portfolio will be subject to its net zero by 2050 emissions reduction objective.
Suncor has named J.P. Morgan Securities Canada to act as its exclusive financial advisor and Blake Cassels and Graydon LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP as its legal advisors on the transaction.