Suncor Energy has made a hostile takeover bid for Canadian Oil Sands. Suncor offered 0.25 of its own shares for each share of COS. Both these oil and gas stocks are based in Calgary. COS’s directors have unanimously advised shareholders to reject Suncor’s bid. They accused Suncor of taking advantage of the oil downturn to buy up COS shares on the cheap. COS has implemented a new shareholders’ rights plan. This gives it time to come up with an alternative to Suncor’s bid—or to convince Suncor to pay more.
On October 5, integrated oil stock giant Suncor Energy Inc. (TSX─SU) made an “unsolicited”, or hostile, bid for Canadian Oil Sands Ltd. (TSX─COS). Suncor is offering 0.25 of its own shares for each share of Canadian Oil Sands. With a 37 per cent interest, Canadian Oil Sands is the largest shareholder in the Syncrude Canada joint venture. Suncor president and chief executive officer Steve Williams said, “We believe this is a financially compelling opportunity for Canadian Oil Sands shareholders.”
Suncor remains a buy for long-term share price gains as well as high and rising dividends. Hold Canadian Oil Sands in case Suncor raises its bid or a higher, competing offer emerges.
Suncor’s offer does include some attractive features. One is that its offer was initially 43 per cent higher than Canadian Oil Sands’ pre-bid share price. Few shareholders are likely to turn down such a juicy premium.
Blue chip stock is a dividend aristocrat among oil and gas stocks
A second positive feature of the bid concerns dividends. Suncor is a “dividend aristocrat” that has raised its dividends for 13 years in a row. Its dividends rose by over 20 per cent a year. By tendering to the offer, Canadian Oil Sands’ shareholders will see their dividends increase by 45 per cent, to $1.16 a share. Suncor’s dividend yield is 3.1 per cent.
A third positive feature is that Suncor is an integrated oil company. That is, it’s involved in every stage of the process: exploring for oil, producing oil and natural gas, refining the production and selling it through its own gas stations.
The company writes that this business model “is designed to generate consistent cash flow which has enabled Suncor to fund its capital program, dividend commitments and planned growth projects, even in sustained periods of lower commodity prices.” Many other producers are starved of cash.
Suncor notes that Canadian Oil Sands’ shareholders would benefit from “ongoing production growth” and an eventual recovery in oil and gas prices.
Debt-to-cash-flow is comfortably low
Indeed, in the latest four quarters, Suncor generated cash flow of $7.402 billion. Subtract cash of $4.892 billion from total debt of $14.126 billion and its net debt is $9.234 billion. Divide this by the cash flow and the company’s net debt-to-cash-flow ratio is a comfortably-low 1.2 times.
Suncor’s cash and cash flow let it pay $310 million to acquire the 10 per cent stake in the Fort Hills oil sands project that France’s Total SA had owned. Total got cold feet.
Suncor also felt confident enough to raise its dividend again, recently hiking its quarterly payout 3.6 per cent to the current level of $0.29, or $1.16 a year and maintaining its dividend aristocrat status. Most commodity producers, by contrast, have cut or eliminated their dividends.
A final plus is that Suncor has structured its offer to defer taxes.
Hold COS for now; a better bid may come
Suncor made its bid conditional upon receiving at least two-thirds of Canadian Oil Sands’ shares. And the bid is scheduled to close on December 4 of this year. Keep in mind that this is enough time for a higher, competing, bid to emerge. Also, as this is a hostile bid, there’s no break-up fee if Canadian Oil Sands accepts another offer. Meanwhile, Canadian Oil Sands’ management would likely rather see a takeover by anyone but Suncor. So if you own Canadian Oil Sands, hold for now. Suncor could also raise its bid.
Suncor Energy, by contrast, remains a buy for long-term share price gains as well as high and rising dividends.
The MoneyLetter, MPL Communications Inc.
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