M&A Announcement

Oct 5, 2015

Ladies and gentlemen, thank you for standing by. Welcome to the Suncor Energy Webinar. During the presentation, all participants will be in a listen only mode. As a reminder, this conference is being recorded, Monday, 10/05/2015. I would now like turn the conference over to Steve Douglas, Vice President, Investor Relations. Please go ahead, sir. Thank you, Kathy, and good morning, and welcome, everyone. We certainly appreciate you joining us on such short notice for this call to go into some detail on Suncor's offer to purchase the outstanding common shares of Canadian Oil Sands. With me here in Toronto this morning are Suncor's President and Chief Executive Officer, Steve Williams and our Executive Vice President and Chief Financial Officer, Alastair Cowan. We'll be taking the next half hour or so to walk through the the slide deck regarding the offer. Our primary goal today is to explain to Canadian Oil Sands shareholders why we believe we've made a compelling offer for you to exchange your COS shares for Suncor shares. As a result of certain restrictions under applicable securities laws, we will not be holding an open question and answer period at this time. During the call and throughout the offer period, you can direct questions to us by e mailing offersuncor dot com, that's o f f e rsuncor dot com, and we'll endeavor to respond promptly to all questions received. You can review the complete offer materials filed on SEDAR and EDGAR or contact our Investor Relations department or our information agent for the offer. The contact details are included on the back page of today's presentation and they're also in the news release and the offer documents, which we filed earlier today. Before we begin, I'd like to point out that Suncor's offer to purchase shares of Canadian oil sands is being made subject to the terms and conditions set out in Suncor's offer to purchase and takeover bid circular dated 10/05/2015 along with the accompanying bid documents. The information being presented today is a summary only, it's not complete and it's qualified in its entirety by reference to the complete text of the offer documents, which should be read carefully before decisions are made with respect to the offer. This presentation should also be viewed and considered in conjunction with the accompanying slide deck, which is available on Suncor's website and can be downloaded. Please carefully review the advisories at the beginning of the slide deck and in the offer documents, both of which provide important information. This presentation does not constitute an offer or a solicitation of an offer to buy or sell securities. Suncor's offer is being made solely by means of the offer documents. And of course, this presentation contains forward looking statements and forward looking information. Forward looking statements and information are not guarantees of future performance and they involve a number of risks and uncertainties. Actual performance may differ materially from those presented by such forward looking statements and information. The presentation also contains a number of non GAAP measures and they're described on Slide four. And finally, our treatment of reserves and our use of BOE, barrels of oil equivalent is described on Slide five. Turning to Slide six, I'm going to take a few minutes to review the offer and then I'll ask Steve Williams and Alastair Cowan to provide some comments. The proposed offer would see Suncor acquire Canadian Oil Sands in an all share transaction valued at approximately $6,600,000,000 Each COS shareholder will be entitled to receive a quarter of a Suncor common share for each COS common share held. Based on the closing prices of the two companies shares on Friday, October 2, this implies an acquisition price of $8.84 per COS share. That represents a premium of 43 percent to Canadian Oil Sands October 2 closing share price of $6.19 On a thirty day trailing basis, the offer price represents a 35% premium to COS' volume weighted average price of $6.54 The offer places an equity value of approximately $4,300,000,000 on COS, which equates to a cash flow multiple of 8.2 based on COS's trailing twelve month data for the period ended June 3035. Assuming closing, COS shareholders are expected to own approximately 7.7% of Suncor. And Suncor's working interest in Syncrude will rise from 12% to 48.74%. The offer has a tender period of sixty days. That time period begins today and it extends to 5PM Mountain Time on 12/04/2015, unless extended or withdrawn by Suncor. The bid is structured as a permitted bid under COS' shareholder rights plan and it's subject to the customary regulatory approvals. I'll now turn over to Steve Williams and Alastair Cowen for their comments. Thanks, Steve, and, good morning, everyone. Today's announcement represents the culmination of several months of work to evaluate an important growth opportunity for Suncor that will generate significant value for both company's shareholders. We believe it's an attractive valuation for Canadian Oil Sands shareholders with the opportunity for them to participate in Suncor's growth and value creation. It's also an excellent fit with our stated goals of running the base business very well, investing in profitable growth, and returning value to shareholders. The transaction is expected to profitably grow our core oil sands business and generate significant value for both our new and existing shareholders. Suncor is the Canadian oil sands pioneer. We bring fifty years of oil sands experience and unmatched knowledge and expertise to the table. We have demonstrated that expertise through our operational excellence program to improve reliability at our oil sands base operations and across Suncor. We've built a strong integrated business with a fortress balance sheet, which has enabled us to produce consistent cash returns for shareholders across the price cycle. In particular, we have outperformed our Canadian peer group over the price cycle, including the recent period of substantially reduced oil prices, a period which most analysts will be with us for some time to come. As the single largest mining and upgrading company in the oil sands and with an existing 12% stake in Syncrude, we are well positioned to take on, Canadian Oil Sands 37% working interest in Syncrude and work more closely with the operator to improve performance and drive synergies. We believe that our offer is compelling on a number of fronts. It represents a substantial premium to the recent Canadian oil sands trading price. It provides a significant dividend, uplift to Canadian oil sands shareholders. It's an all share transaction which is intended to enable, Canadian Oil Sand shareholders to defer the need to recognize gains or losses on the, value of their investment. It provides Canadian Oil Sand shareholders with ownership in a stronger, more diversified company with a better credit profile, lower cost of debt, a strong operating culture, lower operating costs, and more viable and profitable growth prospects. Importantly, following the transaction, Suncor's upstream production will continue to be over 99% oil with over 80% of that production coming from the oil sands. As a result, Canadian oil sands shareholders will retain their exposure to long life, low decline oil sands assets and the significant potential upside associated with any eventual recovery in oil prices. For several quarters now, we have been transparent that we had an M and A team looking at potential transactions that could be value accretive to our shareholders. As it relates to Canadian oil sands, we identified a number of potential synergies between the companies and the opportunity for an increased level of input from Suncor in the ongoing operations of Syncrude. In March, we approached Canadian Oil Sand's CEO and in the course of discussion, the possibility of a negotiated transaction between the two companies was raised. Canadian Oil Sands CEO indicated that there was no interest on the part of Canadian Oil Sands in such a deal. We followed up with a letter several days later confirming our interest in a negotiated transaction, and we received a subsequent letter stating that the Canadian Oil Sands Board had considered the matter and was not interested in proceeding any further. In April, I contacted Canadian Oil Sands directly and arranged to meet with the Canadian Oil Sands Chairman and CEO to better understand the company's position. At that meeting, Suncor's executive again highlighted our interest in a negotiated transaction and outlined the numerous shareholder benefits, that would arise from Suncor's regional perspective as well as additional operational and strategic input, could be provided. We followed up that meeting with a letter summarizing our proposal. A week later, Canadian Oil Sands formally responded with a brief letter advising that the company's board had considered Suncor's proposal and concluded there was no basis to pursue further discussion. Upon receipt of that letter, we decided not to pursue the matter any further with Canadian oil sands at that time. As you all know, in the months that followed, the industry has experienced a significant deterioration of market fundamentals with crude futures pricing declining by approximately 17%. There is now broad consensus among analysts and industry experts that we are structurally lower for longer, oil price world. Suncor has continued to evaluate Canadian oil sands and its future prospects, including potential synergies that would result from its acquisition by Suncor. We remain convinced there are significant benefits to a transaction for all interested parties. However, given the deterioration of market conditions and the more pessimistic prevailing view on oil price recovery, we believe the value of Canadian oil sands has declined since the previous offer was made. As you can see from the chart, oil prices have declined sharply and the futures curve for oil would suggest that it may be several years before we regain the pricing levels we were anticipating at the time the first offer was made. In light of this structural change in the market, we believe the current offer represents a full and fair value for Canadian Oil Sand shareholders and allows them to continue to participate in any potential oil price upside. As Steve mentioned earlier, there are a host of reasons why this deal makes sense for all parties involved. Suncor is offering a substantial upfront premium of 43% to Canadian Oil Sands pre offer share price and a cash dividend increase of 45% in an all share deal that enables the tax deferred rollover. We expect to eliminate $25,000,000 annually in redundant overhead. And of course, Canadian Oil Sands shareholders will retain their exposure to oil and long life low decline oil sands reserves, while gaining exposure to Suncor's diverse asset base, extensive operating experience, history of profitable growth and a rock solid balance sheet. Suncor expects the deal to be accretive over time. We anticipate low integration costs, a 6.9% increase to production per share and continued low leverage with a net debt to capital estimated at 19%. With an enterprise value of $59,000,000,000 as at June year, Suncor is Canada's leading integrated energy company. We currently produce about 580,000 barrels per day of oil, approximately 80% of which comes from the Canadian oil sands. We have abundant reserves, which could support current production levels for over thirty eight years. We have a number of, growth projects in flight that we expect to provide average annual production growth of about 5% until 2020. Our integrated model includes strong midstream capability and a top tier refining network that enables us to maximize the value of our oil sands production. This results in consistently strong cash flow that has exceeded our capital expenditures the past few years. As a result, we have built a strong balance sheet with almost $12,000,000,000 of liquidity. Our strong cash flow and disciplined approach to allocating capital has enabled us to steadily increase the cash returned to our shareholders. Our dividend has increased every year since 02/2002. And over the past five years, it has grown at an annual rate exceeding 20%. The most recent increase occurred in the third quarter of this year when many companies in the sector were reducing their dividends to preserve cash. Since the 2011, we have bought back and canceled over $5,000,000,000 worth of our shares, representing over 10% of the outstanding float. That buyback program continues to be an important option for allocating capital. In order to comply with regulatory requirements, however, we have suspended buybacks for the duration of the Canadian oil sands offer periods. As a result of Suncor's focus and capital discipline and our integrated business model, which enables us to maximize price realizations for production, Suncor has been able to generate over $10,000,000,000 in free cash flow since 2010. With the sharp fall in oil prices in the past year, most companies in our sector, including Canadian oil sands, have shifted to a negative free cash flow position even after substantial reductions in their capital expenditures. However, in the first six months of this year, Suncor produced over $700,000,000 of free cash flow even after investing $1,900,000,000 in growth projects, demonstrating the resilience of our integrated business model in a low crude price environment. Our superior cash generation has enabled Suncor to steadily increase our dividend. Over approximately the past five years, the Suncor dividend has increased by almost 200%. During that same period, the Canadian oil sands dividend has been reduced by 90%. Going forward, Suncor will continue to target a dividend that is competitive, meaningful and sustainable. Suncor's strong financial and operational performance, combined with our commitment to returning cash to shareholders, has resulted in a superior total shareholder return relative to the TSX Energy Index. Over the five year period ending this past Friday, October 2, Suncor shareholders enjoyed a positive 15% return, while the TSX CAP Energy Index provided a negative 32% return and Canadian Oil Sands shareholders suffered a negative 69% return. At the same time, we have maintained a very solid balance sheet with net debt to capitalization of just 17% and a strong investment grade credit profile. In contrast, Canadian Oil Sands net debt to capitalization has risen to 36%, contributing to a downgraded credit profile. While Canadian Oil Sands shareholders accepting this offer will realize immediate benefits such as a price premium and a dividend increase, they do not give up the upside associated with any eventual increase in oil prices. Over 99% of, Suncor's current upstream production is oil and about 80% of it comes from oil sands. With the addition of Canadian oil production, Suncor's upstream will continue to be more than 99% leverage to oil and the percentage of our production that comes from oil sands is expected to rise to just over 82%. Most importantly, we've consistently demonstrated the ability to achieve Brent pricing for our production, thanks to our strong integrated business model. So Canadian oil sands shareholders will be positioned to fully participate in any eventual recovery in global oil prices. One of Suncor's competitive advantages is its very large long life low decline reserve base. We have thirty eight years of proved plus probable reserves. Canadian oil sands has a very large high quality reserve base with a reserve life index of forty six years. The advantage that will accrue to Canadian oil sands shareholders by accepting this offer is that they will participate in Suncor's continued growth from a portfolio of Tier one assets and supported by a strong balance sheet. Over the past five years, Suncor has grown its oil sands and offshore production by an average of 10% annually. During that same period, Canadian oil sands production from Syncrude has actually declined by an average of about 5% per year. Going forward, Suncor has plans in place to continue to profitably grow production through the end of this decade at an average annual rate of approximately 5%, including approximately and 25,000 barrels a day from the Fort Hills mining project and the Hebron offshore project starting in late two thousand and seventeen. Suncor has five decades of oil sands operating experience. We are the largest producer of both mined and in situ bitumen, and we upgrade more of that bitumen than any other company in oil sands. We are forward integrated into the most profitable network of refineries in North America. Across all of our operations, we've undertaken a multiyear operational excellence program that has led to improved reliability and lower operating costs. At the same time, we've invested heavily in r and d spending to develop and operationalize advanced technologies which target lower costs, improved reliability, and reduced environmental impacts. This is the capability and track record that Suncor will bring to bear as a 49% owner of Syncrude. Several times during the presentation, we've mentioned the power of Suncor's integrated business model. Our downstream is widely recognized as an industry leader in reliability and profitability. As these graphs demonstrate, we have consistently outperformed our North American refining industry peers in terms of net earnings per barrel of capacity as well as utilization rates. We run our refineries full and we run them very profitably. For the past several years, oil sands crude has been subject to extreme pricing volatility as a result of takeaway capacity and supply demand discontinuities. The price volatility is widely expected to continue for the next several years until pipeline infrastructure is built out and supply demand logistics come back into balance. When oil sands prices are discounted, Suncor's integrated downstream benefits through the purchase of discounted feedstock into its refineries. By processing the discounted crude into finished transportation fuels and selling those fuels at market price, Suncor effectively captures a global price for its oil sands crude production. In this way, our integrated downstream acts as a hedge against crude price differentials that hurt non integrated oil producers such as Canadian oil sands. With the recent announcement that Enbridge's line nine has been, approved to commence operations, we look forward to increasing the integration of our upstream and downstream operations. By the end of this year, we expect to begin supplying our Montreal refinery with inland crude via pipeline, further strengthening our profitable integrated business model. Suncor is the largest operator in the oil sands with the most diverse set of operating assets. We pioneered mining and upgrading fifty years ago and were among the first to commercialize in situ production in the early 2000s. Today, we are the largest and most profitable oil sands producer and the only oil company, with the assets and expertise to extract, blend, and ship a full range of bitumen blends and synthetic crude oils. Our base plant is located directly adjacent to Syncrude and our various oil sands leases surround it. We will bring strong operating experience to the governance of Syncrude And as a 49% owner of Syncrude, we would commit additional expert personnel to support operational improvements and strategic decision making. We would also explore opportunities to generate synergies in such areas as technology and and logistics. So to sum up, we believe that Suncor is offering genuine value to Canadian oil sands shareholders. We are in the midst of a low crude price environment and the near to midterm prospects for significant price recovery appear poor. The outlook for markets is very challenging, particularly for standalone producers such as Canadian oil sands. Suncor is offering a substantial premium and cash dividend increase to Canadian oil sands shareholders. By accepting our offer, Canadian Oil Sands gain ownership in an industry leader with a strong balance sheet, profitable operations, and a clear path to future growth. Most importantly, in accepting our offer, Canadian Oil Sand shareholders maintain their exposure to oil and the opportunity to participate in any future oil price recovery. We think this offer represents compelling value. Well, thanks to both Steve Williams and to Alastair Cowan for their comments this morning. As I mentioned at the beginning of the call, we will not be taking questions now, but I'd like to remind Canadian Oil Sand shareholders that the offer remains open for sixty days and we will respond promptly to all questions directed to offersuncor dot com. For members of the media listening, they may also want to connect with our media relations team at mediasuncor.com. In addition, over the days and weeks to come, we'll be visiting with Canadian oil sands investors to ensure a full understanding of this offer. That process will begin today. As we sign off, I'd like to thank everyone who listened in on the webcast. We genuinely appreciate your interest in Suncor and we look forward to meeting with many of you in the near future. Thanks everyone and have a good day. Operator, you may disconnect the call.