Canadian Oil Sands CEO will fight ‘ fire sale prices’

Suncor accused of taking advantage of insider information to present ‘ exploitive and opportunistic bid’

Canadian Oil Sands Ltd.’ s CEO Ryan Kubik said Monday his board will fight the sale of the company at what it calls “fire sale prices” and he accused Suncor Energy Inc. of taking advantage of insider information to present an “opportunistic and exploitive” bid.

“They are using all of this opportunism to try to capture value for their own shareholders — that’s good for Suncor shareholders in building Suncor’s empire but not good for Canadian Oil Sands shareholders,” Kubik told the Financial Post on a visit to Toronto that involved mustering shareholder opposition to Suncor’s $ 4.3 billion hostile takeover plan, announced earlier this month.

The COS board unanimously recommended Monday that its shareholders reject Suncor’s $ 4.3- billion bid.

No other offers have been put on the table for Canadian Oil Sands, whose business relies on a 37 per cent stake in the 350,000 barrel per day Syncrude oilsands project, in which Suncor also has a 12 per cent stake. The COS acquisition would raise Suncor’s stake in Syncrude to nearly 49 per cent.

But Kubik said the board believes that Suncor is using a low point in the crude price cycle and the uncertainty around Alberta’s greenhouse gas policies under a new NDP government to severely discount Canadian Oil Sands’ value, while leveraging inside information about plans afoot at Syncrude that have not yet been publicly disclosed to shareholders.

“We have not announced the 2016 budget, but this is an example of some of the inside information Suncor is seeing at the joint venture table,” Kubik said.

“They are contributing to discussions about cost reductions, about reliability initiatives. So they can take a view on that information before it is publicly disclosed, and before Canadian Oil Sands shareholders and the market knows about it.”

Canadian Oil Sands’ financial adviser, Royal Bank of Canada, also provided the COS board with a written opinion that the Suncor bid is inadequate.

Steve Williams, Suncor’s president and chief executive officer told the Financial Post in an emailed statement that COS board’s recommendation does not “detract from the strength of our compelling offer.”

The Suncor offer, which offers one Suncor share for every four shares of Canadian Oil Sands, reflects the new business reality and presents a 43 per cent premium and a dividend increase of 45 per cent, Williams said.

“It also represents an opportunity for investment in a financially stronger, more diversified and stable company that has considerable upside potential in a rising price environment, but can also deliver significant value should oil prices stay lower for longer.”

The COS board presented 15 reasons to reject the offer, noting that the Suncor offer does not recognize key components of its business, including its prized upgrading assets.

“They are essentially asking us to hand them over for nothing,” Kubik said. “Any multinational or major oil would love to own and have these resources — it has virtually no production decline for the next few decades.

He pointed out that Suncor paid $ 56,000 per barrel to buy an additional 10 per cent stake for the underconstruction Fort Hills project from its partner Total SA — already considered a low price — just weeks before offering $ 54,000 per barrel for COS assets.

“It’s a discount on a discount,” Kubik said, noting that the company had the unanimous backing of major shareholders to reject the deal.

In addition, at 0.25 of a Suncor share for each COS share, the bid offers even less than the 0.32 share Suncor originally proposed in April when it first approached the board to discuss a friendlier takeover.

“I call that a take- under, not a takeover,” Kubik told shareholders during an investor call. “It was clearly not in shareholders’ interest and now six months later Suncor has chosen to lower that proposal even further.”

West Texas Intermediate prices fell 19 per cent in the third quarter, leaving many Canadian companies vulnerable and COS had shed 40 per cent of its value before Suncor offered to buy the company. COS stock has surged 55 per cent this month, but was down 1.5 per cent to $ 9.77 at Monday’s close.

The Syncrude operation has suffered from high cost and operational issues in recent years and has periodically been speculated as a takeover target for either Suncor or Imperial Oil Ltd., which manages the Syncrude project and owns a 25 per cent stake in the venture.

But Kubik said the company has not been approached by either Imperial or other shareholders in the Syncrude joint venture, which also include China’s Sinopec Ltd. and Nexen Oil Sands Partnership, Murphy Oil Co. and Japan- owned Mocal Energy.

The COS board is examining alternative strategies, which could include the company acquiring more of Syncrude itself.

“We would look at the full range of alternatives, right from staying independent to selling the entire company at full and fair value,” Kubik said.

The company has enacted a shareholder rights plan, or socalled poison pill, that allows existing shareholders to buy COS stock at a steep discount to market prices if Suncor, or another acquirer, buys more than 20 per cent of the company.

Kyle Preston, analyst at National Bank Financial, who had previously recommended COS shareholders take the Suncor offer, told clients he is reassessing his view.

“We expect Suncor will more than likely follow up with a higher more competitive bid, but would not expect them to chase this offer much higher than the current market price of COS given the uncertainties around the future operational reliability of Syncrude and the oil market in general,” Preston said.

COS also revised its production downward this year, but said cost savings will increase to $ 1.3 billion from its earlier estimate of $ 900 million.

At the heart of the bid is how investors view the future of crude oil prices.

“Our share price is correlated 98 per cent to crude oil prices, Suncor is 66 per cent,” said Kubik, noting that COS shareholders believe oil prices will go higher in the long term. “Our assets deliver the most torque to the upside in crude oil