CALGARY – Suncor Energy (TSX:SU) is tightening its grip on the Fort Hills oilsands project by paying $310 million to take an additional 10 per cent stake off one of its partners hands.
The seller is Total E&P Canada Ltd., a subsidiary of Paris-based Total SA, which will retain a 29.2 per cent interest — remaining the second-largest partner after Suncor.
Once the transaction closes, Suncor will own 50.8 per cent of the $15-billion project and 20 per cent will be owned by Teck Resources Ltd. (TSX:TCK.B), which has waived its right to increase its share proportionately.
The deal comes as U.S. crude prices hover at around US$46 a barrel — around half of where they were a year ago — with no end to the doldrums in sight.
In a release, Total said it had weighed how its global assets stack up in the context of low oil prices and decided to reduce exposure to Canada’s oilsands.
Despite the gloomy outlook, Suncor CEO Steve Williams said the purchase makes sense in the long term.
“This opportunity to acquire an additional interest at a discounted price underscores Suncor’s confidence in its position within the oilsands,” he said in a release.
“We consider this project to be one of the best opportunities for long-term sustainable growth in the industry today, thanks to the exceptional quality of the resource and our disciplined project execution.”
Suncor said the transaction can be undertaken within its current 2015 capital budget of between $5.8 billion and $6.4 billion. Engineering is over 90 per cent complete and construction is more than 40 per cent complete.
The mine, north of Fort McMurray, Alta., is expected to start producing oil in late 2017, eventually ramping up to 180,000 barrels a day.
Desjardins Capital Markets analyst Justin Bouchard said there’s a strategic element to the deal, as Suncor now has majority control of Fort Hills.
“We believe this reduces the operational risk of the project,” he wrote in a research note. “For items that require majority approval, Suncor now has the ability to move ahead without its partners (if needed).”
In all, Suncor’s capital spending increase at Fort Hills is estimated at just over $1 billion, when both the acquisition and $700 million in future spending is taken into account.
In a research note, CIBC analyst Arthur Grayfer said Suncor is getting a good deal for the price — the increased stake means an additional 18,000 barrels of day of production that won’t decline for 50 years.
Assuming prices improve, Grayfer said Fort Hills will be the “free cash flow engine for all growth initiatives for the next decade.”
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