Suncor and Petro Canada Merger

TABLE OF CONTENTS

Introduction 1

Industry Analysis 1

Petro-Canada Pre-Merger 3

Suncor Pre-Merger 5

The Terms of Transaction: 7

Setting for the Analysis 9

Post Merger Performance 12

Conclusion 13

Bibliography/References 14

Introduction

Mergers and acquisitions have become a key function in the business world. Proper management and strategic planning are required for a merger to be successfully completed. The oil industry is a an always strong and developing market therefore the Suncor/Petro-Canada merger provides a great example of a merger that can benefit both parties and allow the development of one well organized prospective company. The report provided below will cover the main aspects involved in a merger. Key points include, the economic setting of the business, the terms and conditions of the transaction, analysis, post-merger performance as well as an evaluation and prognosis.

Industry Analysis

When looking at past Merger & Acquisitions, economic conditions and goals heavily influences the true motives of each company involved. Suncor and Petro-Canada's merger in the summer of 2009 was indeed no different. Both major Canadian public companies in the Oil and Gas industry were faced with very unique circumstances that truly marked a milestone in Canadian Corporate Finance.

The Oil and Gas industry in the past few years has been extremely volatile. Especially in the recent economic turndown, the volatility of gas and oil in the commodities market is a difficult aspect of riskiness that corporations try to hedge. As we will see for Suncor and Petro-Canada in 2008-2009, these economic variables were working against their success in the energy market. As mentioned before, there are many motives for M&A. However, it seems that although it was evident that a merger of both companies could improve financial performance, it was the collapse in commodity prices and high costs of accessing capital that initiated the idea of a merger.

Chart demonstrating the crash in oil prices that lead Suncor and Petro to merge and hedge them against future volatility risk exposure

The prices of most commodities are highly correlated with oil and gas prices. The increasing demand of these commodities matched with a slower increasing rate of reserves creates higher prices which thus creates the high volatility of the market. Hence, energy companies must be highly developed in risk management. Furthermore, in Suncor and Petro-Canada's situation, their economic setting of 2008-2009 created difficult circumstances that both companies acted upon. They decided to diminish their risk exposure by merging together creating Canada's biggest energy company.

Petro-Canada Pre-Merger

OPERATIONS

Petro-Canada was established by the federal government in 1975, to be a significant Canadian player in the energy sector and to discover the country's energy resources. Prior to the merger with Suncor in August 2009, Petro-Canada was one of Canada's largest oil and gas companies, with a value of $19.18 billion, operating both upstream and downstream in the industry, domestically and internationally. Petro-Canada developed resources, providing energy products and services worldwide. It grew rapidly and had acquired assets of foreign firms like Atlantic Richfield, Pacific Petroleum, Petrofina, BP and Gulf. The government sold its ownership of the company in 2004 but held onto some responsibility of restrictions on certain shareholder actions.

PERFORMANCE/ FINANCIAL

Petro-Canada common shares traded on the Toronto Stock Exchange as PCA and the New York Stock Exchange as PCZ. Before joining Suncor, PCA shares were trading at a discount; the share price was falling from $53.25 at the end of 2007 to $26.72 at 2008 year end, on the TSE and on the NYSE the stock dropped from $53.62 to $21.89, in 2008. The stock was underperforming compared to competitors, including Suncor, due to the company's focus on long term goals, rather than benefitting investors looking for quick, short term gains. The strategy was to grow and create value in the long run. This mid-sized energy firm had a market capitalization of about $13.6 billion. Net earnings increased 15% to $3.134 billion in 2008, compared with $2.733 billion in 2007. Petro-Canada had a strong liquidity position that they planned to hold in 2009. With a current ratio of 1.3318, the firm has sufficient assets to cover short term debt. Being below 2, this current ratio also shows that the company is using it's assets to grow the company.

Initially, Petro-Canada did not intend to pursue any mergers and acquisitions in 2009 necessarily but felt flexible enough to compliment their existing assets if a positive opportunity were to be presented, which eventually was the case, with Suncor. When the offer was made by Suncor, March 23, 2009, to acquire Petro-Canada; PCA shares jumped up 25% to $37.07 and SU shares went up 3.72%, up to $32.09.

In the last quarter of 2008, Petro-Canada suffered a loss of $691 million, due to crashing oil prices and some project financing issues. Due to this loss and the expectation that the economy would continue to weaken in 2009, management lowered the production forecast.

STRATEGY/ FOCUS

The company's focus on solid operational execution, prudent use of financial strength and quality growth, lead Petro-Canada to have high potential for short and long term success. Being a strong company within the industry, with a strong financial position, Petro-Canada was able to maintain growth projects through the economic downturn and the falling commodity prices. The company intended to advance on major growth projects in 2009, such as foreign developments and extensions on existing units. Prior to the merger, it was shifting its focus out of Canada, into United Kingdom North Sea, U.S. unconventional gas along with Libya and Syria in North Africa