Analysis Of Suncor Energy And Canadian Oil Sands Merger

Critical Analysis of Mergers and Acquisition

Describe about the Strategic Management for Civil Conflict.

The aim of this report is to critically analyze the merger and acquisition deals that have taken place between the years 2014 and 2016. The years were crucial for the energy industry as there was a price drop in oil affecting profit margins and spending on projects (Cimilluca 2015). The oil drops might have put a damper on the energy industries but it did not stop them from making merger and acquisition deals. The emerging economies such as India, Russia and Brazil experienced economic trajectories in the beginning of the century (Bowler 2015). However, the same countries experienced dropping oil prices with the ravenous demand from the year 2014 onwards (Bowler 2015). The merger and acquisition activities have continued despite 60% decline in oil prices in the year 2014 (Cimilluca 2015).

The main reason of merger is to expand market and ensure better client base. The existing situation and performance of the companies could be improvised due to which the merger and acquisition deals could prove beneficial (Cimilluca 2015). Several organizations went through merger and acquisition deals in the two years such as Energy Transfer Equity LP acquired operator Williams Cos., Schlumberger Ltd and Cameron International Corp, Royal Dutch Shell and BG Group (Cimilluca 2015). This report focuses on the merger case between Suncor Energy and Canadian Oil Sands.

Every organization has certain strategy or motives for merging and making acquisitions. A few common reasons are that the company get tax advantage from its location to another. It also increases liquidity of the owners. The acquisition of a certain company could be more appealing for gaining the market share. The merger and acquisitions could initiate a new form of growth for the company. It could enable healthy liquidity position thereby providing financial advantage. The company shall get a benefit in terms of synergy, which would enable the sum of performance after the acquisition (Brakman et al. 2013). The most important concern that rises in today’s economy is the impact of deals on merger and acquisitions. There has been a significant rise in the merger and acquisition deals in the energy industry. This section critically analyzes Suncor Energy and Canadian Oil Sands internally and externally using appropriate academic models.

Suncor Energy is a Canadian company that specializes in production of synthetic crude from oil sands. Their vision is to be trusted and deliver economic value, healthy environment and improved social living (Suncor.com 2016). The company was established in 1967 and it has grown to be a competitive company producing heavy crude oil, conventional oil and natural gas (Suncor.com 2016).

Suncor Energy and Canadian Oil Sands

Canadian Oil Sands Limited is a Canadian company and has a Syncrude Joint Venture. This is an oil sands mining facility holding a significant market share and has the largest stake of any joint owners (Suncor.com 2016).

In the year 2015, Suncor Energy acquired Canadian Oil Sands at $4.9-billion (Water et al. 2016). The shares were significantly discounted and amalgamation was bad timing according to a few shareholders (Water et al. 2016). Suncor revised its deal and lowered the threshold of support for ending a public feud between the partners in the Syncrude Canada Ltd. mining and upgrading project (Lewis 2016).

There are a few key reasons that explain why Suncor wanted Canadian Oil Sands (COS) so much. Suncor has been involved in the oil sands business and it was likely to increase from 80% to 83% after the acquisition (DiLallo 2016). Suncor would get control of 37% interest that COS had from Syncrude oilsands (The Canadian Press 2016). The company had the intention of decreasing the cost and improving the operations at Syncrude after it had more control (Mancini 2016). It could bring better reliability. It would allow Suncor to acquire the company when Canadian Oil Sands price would be low (Mancini 2016). It shall set up a higher return when price rises. The differential between West Texas and Western Canadian Select could be eliminated (Mancini 2016). COS agreed to the deal as the share price is more directly tied to oil prices. If the oil prices would fall, the share price for COS would drop significantly. It would be harmful for the company so the merger was the best way out. The deal was beneficial for both the companies as Suncor was getting the assets and COS was getting increase in the offer (The Canadian Press 2016).

The deal has made support to both the companies that are Suncor and the Canadian Oil Sands. The transaction gave an excellent value to Canadian Oil Sands shareholders. The merger has strengthened the financial position of both the companies. Currently, the breakeven price of US$31 per barrel grew at US$37 per barrel making the operation lower cost (DiLallo 2016). Suncor could also improve Syncrude’s performance from 12% to 49% with time (DiLallo 2016). The overall benefits obtained are lower cost per barrel and better return for the shareholders (DiLallo 2016).

Suncor was actually offering to pay more for Canadian Oil Sands. The acquisition would prove to be a better asset in the long-run that made Suncor’s bid fair. Canadian Oil Sands investors were appealed by the deal as the Syncrude asset was underperforming at 67% (DiLallo 2015). At that time, there were no alternative measures or competing offer that they were aware of. The oil prices had sharply declined recently. Also, with Suncor’s diversified portfolio and strong financial figures, it would be easier for COS to handle the risk of a low price environment. The decision on merger could either make or break COS’s future (DiLallo 2015).

Reasons of Merger

Canadian Oil Sands resisted the bid while the merger was offered. Suncor faced pressure from its shareholders and lost their support when it decided to take over Canadian Oil Sands. The bid was extended twice as the company was threatened by its shareholders. The company also faced diminishing prospects and resistance (Lewis 2016). The shareholders said that Suncor was “trying to pull a fast one” and the company was trading at less than US$40 a barrel (Denning 2016). Canadian Oil Sands’ investors are thus in the unenviable position of knowing that they are being low-balled but running a risk of further pain if they don’t sell (Denning 2016). The shareholders of Canadian Oil Sands further urged to reject Suncor’s merger offer as the deal was claimed as ‘entirely opportunistic’ and saying it “substantially undervalued” the company (Williams 2015).

trengths

• Suncor has a strong global presence and holds a high rank in the market.
• Suncor collaborates with strong brands for strengthening its operations. The company merged with Petro-Canada in 2009 and Total E&P Canada in 2011 (DeBlois et al. 2014).
• Suncor has a strong balance sheet that helps them expand business, grow and increase profits (Wan Ahmad et al. 2016).
• The superior technology helps in meeting the needs of customers that are difficult for the competitors to imitate. The technological advancements have helped in reducing emission and pollutants. The technology reduces overall environmental impacts and enhances reliability and profitability. The shaft failures are also eliminated (Sustainability.suncor.com 2015).
• Suncor has a strong resource base with over 14,000 employees (Sustainability.suncor.com 2016).
• The core business is oil sands and they are developing the world’s largest petroleum basins, Athabasca oil sands (Sustainability.suncor.com 2016).
• With a strong transportation network, Suncor can transport natural gas to its oil sands that is operated in Albersun pipeline. Suncor owns a pipeline with a capacity of 110,000 bpd for transporting synthetic crude oil from Fort McMurray to Edmonton (Suncor.com 2016).

• Suncor is highly dependent on the American market. If the American market does not demand Canadian oil, the price drop will lead to a series of events and new project development would slow down (McCullough 2013).
• Canadian Oil Sands faced competitive disadvantage due to its small size in the large pool of competitors (Radnejad and Vredenburg 2015).
• The company is dependent on oil sand segment on up graders.
• The nature of operations degrades the environment and invites environmental compliance (Sustainability.suncor.com 2011).
• Suncor Energy experiences high staff turnover as they are poached by competitors and contractors (Sustainability.suncor.com 2016).

• There is an opportunity for development of Firebag oil sands to conserve the environment (Cowie et al. 2014).
• Suncor can also develop alternate energy sources.
• The wet crushing technology at Canadian Oil Sands is a competitive advantage over other competitors (Spence et al. 2015).
• There is opportunity for high margin in conventional oil and natural gas for production in White Rose, Hebron, Terra Nova and various others (Paine et al. 2014).
• There is significant opportunity in reducing the carbon dioxide emissions
• There is a scope to increase the pipeline capacity.
• Norwegian Ministry of Petroleum and Energy has offered 56 exploration licenses on the Norwegian Continental Shelf (NCS) in its latest licensing round (Offshore Energy Today 2016). This opportunity can be utilized by Suncor for exploration.
• There is an opportunity for developing in-situ projects, investments and ongoing production in international and offshore operations.

• The organization faces intense competition with other market players in terms of geographical reach and financial resources such as Exxon (Hume 2016).
• The fluctuation in oil and gas prices can impact the operations cost (Wan Ahmad et al. 2016).
• The economic slowdown affects the efficiency and profitability of the company (Leach 2014).
• The pipeline damage might be a threat as the transportation of natural gas is through it. If the pipeline does not function well, it may negatively affect the overall operations of the company.
• Oversupply from the oil sands could decrease the premium (Hume 2016).
• Labour shortage could also affect operations as the company experiences high turnover.
• Suncor may be affected from changes in environmental health, and safety (EHS) regulations (Du and Vieira 2012).

Five Forces	High/ Low	Analysis
Bargaining Power of Suppliers	Moderate	Suncor is a leading company with well-organized markets. They focus on low production cost for achieving economy of scale. There is limited bargaining power.  A focus on low production costs to achieve economies of scale is a requirement needed to be achieved. The power of suppliers has low impact on the oilfield service industry as it depends upon quality of the product, price and timely delivery (Yusuf 2014). The strong management, financial strength and operational skills reduce the threat of suppliers over the organization. However, suppliers require a high level of technical knowledge and competencies in this industry which increases their bargaining power (Spence et al. 2015).
Bargaining Power of Buyers	Moderate	With the advanced technology, Suncor provides cheaper yet high quality of products and services. The company has a large pool of customers that allows in successful operations and capturing market share (Hiatt, Grandy and Lee 2015).The buyers have a positive relationship with the organization due to which there is shift of power between the company and supplier (Hiatt, Grandy and Lee 2015). The buyers have a positive relationship when they find greener alternatives. The buyers have moderate bargaining power as the oil companies bid with each other to get contract of buyers. The companies deliver efficient quality of services at low prices to gain customers (Yusuf 2014).
Intensity of Existing Rivalry	High	The companies that are exploring or extracting oil are direct competitors. There is intense competition in terms of price and product differentiation. The company faces tough competition from EnCana Corporation, Chevron Corporation and ConocoPhillips (Sueyoshi and Wang 2014). The industry indicates high intensity as the buyers have low switching cost and there are low levels of product differentiation. The market is more volatile than it appears. These factors foster more intense rivalry (Hiatt, Grandy and Lee 2015).
Threat of Substitutes	Moderate	There is a tendency for the customers to prefer alternate sources such as coal, solar power, hydro power that may be commercially feasible (Hiatt, Grandy and Lee 2015). However in the short run, the threat of substitutes is low. There is a tendency for the customers to prefer alternate brands. The customers may switch to substitutes due to the price offered. However, the product cannot be fully replaced keeping in mind its quality and utility (Hiatt, Grandy and Lee 2015).
Threat of New Entrants	Low	It is not easy to enter into the industry as Suncor has high reputation in the market. The leadership in the Canadian industry forms a solid foundation and reduces the threat of entrants. There are other factors such as technology, corporate reputation, code of conduct and sustainable practices that make it difficult for the other firms to enter. The barriers to entry further include political and governmental pressures, large capital investments, physical hazard and risk and requirement of highly trained workers. Oil drilling could be hazardous (Hiatt, Grandy and Lee 2015).

Conclusion

There has been a significant rise in the merger and acquisition deals in the energy industry. The above report critically analyzes a few companies in the energy industry that have undergone organizational changes. A few common reasons are that the company get tax advantage from its location to another. It also increases liquidity of the owners. The acquisition of a certain company could be more appealing for gaining the market share. Companies expect that the merger and the acquisitions would enable to get a benefit from the competitive landscape. In the year 2015, Suncor Energy acquired of the Canadian Oil Sands at $4.9-billion. It could bring better reliability. Suncor Energy is a Canadian company that specializes in production of synthetic crude from oil sands. Canadian Oil Sands Limited is a Canadian company and has a Syncrude Joint Venture. This is an oil sands mining facility holding a significant market share and has the largest stake of any joint owners. COS agreed to the deal as the share price is more directly tied to oil prices. It allows Suncor to acquire the company when Canadian Oil Sands price would be low.

Suncor can also develop alternate energy sources. The merger has strengthened the financial position of both the companies. The acquisition would prove to be a better asset in the long-run that made Suncor’s bid fair. Also, with Suncor’s diversified portfolio and strong financial figures, it would be easier for COS to handle the risk of a low price environment. The bid was extended twice as the company was threatened by its shareholders.

Benefits Experienced

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