Suncor Goes All In on Oil Sands With Buy of Total’s Canada Ops

Suncor Energy (CA:SU) announced on April 26 that it was acquiring Total Energies’ (US:TTE) Canadian operations for $5.5 billion, plus additional payments of up to $600 million based on Western Canadian Select benchmark pricing and specific production targets.

The Canadian operations include a 31.23% working interest in Alberta’s Fort Hills oil sands mining project and a 50% working interest in the Surmont in situ asset.  Suncor notes in its press release that the acquisition “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.”

If it wasn’t fully committed to the oil sands before this acquisition, it is now. The transaction secures 100% ownership at the Fort Hills mine, which currently has 194,000 barrels per day of production capacity. As a result, it now has enough bitumen supply beyond the 2030s.

“This transaction represents a major step in securing long-term bitumen supply to our Base Plant upgraders at a competitive supply cost,” said Rich Kruger, president and chief executive officer. “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.”

Don’t Forget the Surmont Asset

While obtaining the remaining outside interest in the Fort Hills mine is critical to this transaction, the Surmont project provides Suncor with another excellent oil sands asset.

Surmont is operated by ConocoPhillips’ (US:COP) Canadian operations. It owns the other 50% of the asset. As part of its joint venture with Total, ConocoPhillips must waive its right of first refusal on the 50% for the transaction to proceed. That’s expected by the end of September.

Surmont’s proved and probable reserves are 1.38 million barrels, two times what Total’s interest adds at Fort Hills. The life on those reserves is approximately 50 years. That’s based on daily production of 70,000-75,000 barrels. Based on the 2023 forecast price for a barrel of Western Canadian Select (WCS) of US$69, that’s annual revenue of US$1.8 billion.

While Fort Hills gets all the attention, acquiring Total Energies’ 50% interest should be a good money maker for Suncor for years.

Downside of the Acquisition

As the company stated in its press release announcing the acquisition, the debt acquired to pay for the assets will take its net debt levels above its target of $12 billion-$15 billion.

However, despite the additional debt burden, it plans to continue to allocate its free cash flow after paying for dividends — Suncor says it will increase its quarterly dividend by 10% once the deal has closed —  in a 50/50 split between debt repayment and share repurchases.

It is targeting about US$9 billion in net debt reduction in 18-24 months at strip pricing, according to its investor update.

The assets acquired will increase its free cash flow and free cash flow per share. As a result, it should be back within its net debt target by the end of 2024.

The biggest risk to the company at this point is WCS prices — forecast in the best case scenario to reach US$142 a barrel by 2030 — don’t do what they’re supposed to, leaving Suncor with expensive assets that aren’t delivering a sufficient return on investment.

Beyond that, the deal looks like a winner.

This article originally appeared on Fintel

By Will Ashworth