Team of Rivals

Petro-Canada retail sites to survive merger with Suncor Energy

Greg Lindenberg, Editor, CSP

CALGARY, Alberta -- The Canadian government will take consumer interests into account when reviewing a proposed takeover of Petro-Canada by rival Suncor Energy Inc., reported Reuters. "As the Competition Bureau does its work, the government will be informed, the government will take all, each and every necessary step to ensure that the interests of Canadian consumers and their needs are fully protected," said Diane Ablonczy, minister of state for small business, responding to a question in Parliament by a legislator who expressed concern about the impact of the deal on refining [image-nocss] capacity and retail fuel prices.

As reported in a CSP Daily News Flash yesterday, Suncor and Petro-Canada have agreed to merge the two companies. Upon completion of the $19.12 billion (Canadian; $15.5 billion U.S.) transaction, the combined entity will operate corporately and trade under the Suncor name, while maintaining the strong brand presence and customer loyalty of Petro-Canada in refined products.

While Suncor was a recognized name within the investment community, Rick George, president and CEO of Suncor, and who will assume the same role with the merged entity, said during a conference call with analysts that the two companies "recognized that Petro-Canada has the No. 1 brand recognition in the marketplace," which has lead to their decision to keep that name downstream.

Although the combined company will have a major upstream focus, especially on oil sands, both companies have notable downstream operations.

Calgary, Alberta-based Suncor is an integrated energy company that operates a refining and marketing business in Ontario with retail distribution under the Sunoco brand. U.S. downstream assets include pipeline and refining operations in Colorado and Wyoming and retail sales in the Denver area under the Phillips 66 brand. Suncor Energy (U.S.A.) Inc. is an authorized licensee of the Phillips 66 brand and marks in the state of Colorado. Sunoco in Canada is separate and unrelated to Sunoco in the United States, which is owned by Sunoco Inc., Philadelphia.

Petro-Canada, also based in Calgary, is one of Canada's largest oil and gas companies, operating in both the upstream and the downstream sectors of the industry in Canada and internationally. It operates a network of more than 1,500 retail and wholesale outlets (1,323 retail sites, according to Reuters) across Canada.

Founded by the Canadian government in 1975 as a state-owned oil company, Petro-Canada was given preferential access to new exploration lands and was augmented with the purchase of the Canadian operations of Atlantic Richfield, Pacific Petroleums and others. It expanded overseas in 2002 when it acquired the exploration and production assets of Veba Oil & Gas for $3.2 billion (Canadian), nearly doubling output. The government first began selling shares to the public in 1991 and completed the privatization in 2004, when it sold its remaining 19% stake. (Click here for previous coverage.)

"This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," said George. "The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada's east coast and internationally."

Ron Brenneman, president and CEO of Petro-Canada, and who will assume the role of executive vice chairman in the merged company, said, "The merger will be good for shareholders of both companies with reduced capital requirements, operating efficiencies and complementary integration opportunities between upstream and downstream assets. The increased scale provides more stability in volatile markets, plus the financial and organizational capability to successfully take on large-scale projects in the future."

During the analyst call, Brenneman cited two compelling reasons for the merger: The need to face global competition in a time of economic uncertainty, and how combining businesses will give both entities the ability to drive "prudent and substantial" growth.

The merging companies estimate achieving annual operating expenditure reductions of $300 million (Canadian). These savings are expected to come from efficiencies in overlapping operations, streamlining business practices, and improved logistics. The companies also expect to achieve annual capital efficiencies of approximately $1 billion (Canadian) through elimination of redundant spending and targeting capital budgets to high-return, near term projects.

When asked about possible layoffs as part of the announced $300 million in anticipated operating-cost reductions, George said, "You can imagine water cooler talks on both [companies].... There will be some near-term job reduction. However, we expect increased investment in Canada, which will create construction [jobs] near-term and operating jobs in the mid- to long term, and [ultimately,] wealth creation in terms of investment, employment and taxes paid."

John Ferguson, Suncor chairman, will serve as chairman of the merged company.

Completion of the proposed merger is conditional on approval of Suncor and Petro-Canada shareholders, compliance with the Competition Act and satisfaction of other customary approvals including regulatory, stock exchange and Court of Queen's Bench of Alberta approvals.
Click here
for a PowerPoint presentation on the merger.

Click hereto view CSP magazine's feature on Petro-Canada's Neighbours c-store concept.