Shell bid may start rush for oil sands majors
Royal Dutch makes $7.7-billion offer
DAVID EBNER
From Tuesday's Globe and Mail
CALGARY — Royal Dutch Shell PLC's $7.7-billion bid for the portion of Shell Canada Ltd. it does not own could be the beginning of a rush by international companies looking for major Canadian players in the Alberta oil sands, observers say.
Royal Dutch Shell already owns 78 per cent of Shell Canada and yesterday told the board of directors at Calgary-based Shell Canada it is preparing to make a formal bid of $40 a share in cash, adding that it would not proceed unless it has majority support among minority shareholders.
Companies now potentially in play include Canadian Oil Sands Trust, which owns the largest stake in oil sands miner Syncrude Canada Ltd., and Imperial Oil Ltd., majority owned by Exxon Mobil Corp., according to Kim Shannon, president of Sionna Investment Managers Inc.
UBS Securities Canada Inc. said other oil sands names such as Suncor Energy Inc., Canadian Natural Resources Ltd., Nexen Inc. and EnCana Corp. "could all be considered takeout targets."
The reasons for international interest in Canada and the oil sands are abundantly clear. The country is a rarity in the world of crude, a politically stable jurisdiction where oil production is forecast to rise to 4.5 million barrels a day by 2015 from 2.5 million now. That would vault Canada to the No. 4 position among the world's oil producers, behind Saudi Arabia, Russia and the U.S.
"Symbolic for all Canadian oil companies, the trading has begun," said Ms. Shannon, whose firm is one of largest shareholders of Shell Canada, a major oil sands producer with large natural gas holdings as well.
UBS, in a report, said: "[Royal Dutch] could be the kickoff to widespread consolidation in the Canadian oils as majors seek to position themselves with large, low-risk resources."
Len Racioppo, president of Jarislowsky Fraser Ltd., a large Shell Canada shareholder, said the Canadian market in general "is wide open to anyone in the world," adding that lower oil and natural gas prices compared with highs seen in the past year could stoke activity.
"It wouldn't surprise me if the [mergers and acquisition] activity began to percolate in energy," Mr. Racioppo said.
Such activity isn't a given, however. The price tags could be astounding and that could potentially quell wholesale consolidation. Suncor's market value is $39-billion, suggesting a successful bid would have to be roughly $50-billion, which is more than double the $19-billion being paid by Brazil's Companhia Vale do Rio Doce for Canadian miner Inco Ltd.
"Never say never, but we're a pretty big company," Murray Edwards, vice-chairman of Canadian Natural Resources, told reporters recently. Canadian Natural is worth $30-billion and he suggested he would be unwilling to sell, noting that he had never entertained overtures.
"Never had meetings, no discussions," Mr. Edwards said.
The potential of large-scale takeovers follows escalating international interest in the oil sands, highlighted by several much smaller deals, including Total SA of France's $1.7-billion purchase of junior Deer Creek Resources last year.
Beyond its interest in Shell Canada, Royal Dutch has already poured money into the oil sands, this year paying about $600-million at provincial government auctions to lease fringe land for which commercial technology to extract the crude doesn't even exist.
The company, based in The Hague, was hit with a scandal several years ago when it was revealed its reserves were far smaller than disclosed, and is struggling to rebuild that base.
Options for Royal Dutch Shell's growth in other countries are problematic. In Russia, the company is dealing with an angry government, where the Kremlin has threatened to revoke permits at a Royal Dutch development in Russia's far east.
"We look at Canada as one of our major growth areas for decades to come," Peter Voser, Royal Dutch chief financial officer, said in an interview.
Among Shell Canada's largest shareholders are Capital Research & Management of Los Angeles, Sionna of Toronto, Jarislowsky Fraser, of Toronto, and Calgary's Bissett Investment Management.
Many of the shareholders believe Shell is worth more than $40. The company's stock hit an all-time high of $47.19 a share in January. It has a large operating oil sands mine, with plans for large expansions, and holds oil sands interests in northwestern Alberta as well. Shell Canada also has strong natural gas assets in the Alberta Foothills and the Mackenzie Delta.
"Forty dollars is not sufficient," said Garey Aitken, a Bissett vice-president. "There's a lot of hidden asset value here."
Stock of Shell Canada jumped to $42.55 on the Toronto Stock Exchange yesterday, up $9.75 or 29.7 per cent from Friday's close of $32.80.
Mr. Racioppo said Royal Dutch is being "opportunistic," adding that the bid could rise far higher, and further noting that he would be content to continue to hold Shell Canada shares if the price isn't right.
Royal Dutch insisted its offer was "full and fair," though Mr. Voser seemed to suggest that the price could rise. "I think the market, indeed, will determine the price of the deal," Mr. Voser said.
A further issue, for Alberta and Canada, is where Royal Dutch would upgrade the raw bitumen it extracts. Royal Dutch said yesterday it very much plans to export bitumen to the U.S. or further abroad for upgrading and refining.
With a file from David Parkinson