Suncor, April 27, 2023:
Suncor Energy (TSX: SU) (NYSE: SU) today announced that it has agreed to purchase TotalEnergies’ Canadian operations through the acquisition of TotalEnergies EP Canada Ltd., which 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. The acquisition is for cash consideration of $5.5 billion, with the 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.
Two assets were purchased. It wasn’t entirely clear what the price allocation between both assets were. Now we know:
31.23% Fort Hills – CAD$1.5 billion / $160 million contingent consideration
50% Surmont oil sands – CAD$4.0 billion / $440 million contingent consideration
Suncor purchased from Teck 21.3% (minus Total Energies’ right of first refusal component of 6.65%) for $1 billion. Suncor ended up with another 14.65% in total. The 31.23% consideration for $1.5 billion is roughly in-line with what Teck paid.
How did we figure this out the split between the two major assets?
May 26, 2023:
ConocoPhillips (NYSE: COP) today announced that it is exercising its preemption right to purchase the remaining 50% interest in Surmont from TotalEnergies EP Canada Ltd. for approximately $3 billion (CAD$4 billion), subject to customary adjustments, as well as contingent payments of up to approximately $325 million (CAD$440 million). ConocoPhillips currently holds a 50% interest as operator of Surmont and will own 100% upon closing. This transaction is subject to regulatory approvals and other customary closing conditions.
Here’s the kicker:
Based on $60 WTI, the transaction will add approximately $600 million of annual free cash flow in 2024, inclusive of approximately $100 million of annual capex for maintenance and pad development costs.
That’s US dollars – US$60 WTI = US$600 free cash flow, or about CAD$817 million. Suncor was paying about 5.4x free cash flow. Logically it is even better when WTI is greater than US$60! This should have been a pretty easy decision for ConocoPhillips to exercise the right of first refusal.
All of this was unfortunate because Total Energies was planning on doing a spinoff of these two assets and depending on valuation, I was planning on getting into this firesale. No longer!
It is no kidding that Suncor stock is down today – Surmont is 75,000 boe/d of low-cost production. Fort Hills has a rated capacity of 194,000 boe/d. While it is a nice consolation prize (especially as the entire operation is now consolidated in Suncor), the Surmont asset is something I’d like to get into at the price Suncor was paying!