UTS back in play with TOTAL (G&M)

French giant Total buying Calgary’s UTS

After two failed takeover bids, global major joins the rush to the oil sands with $1.15-billion offer

Eric Reguly

Rome — Globe and Mail UpdatePublished on Wednesday, Jul. 07, 2010 6:41AM EDTLast updated on Wednesday, Jul. 07, 2010 9:35AM EDT

After a year of hesitation, French oil giant Total SA (TOT-N45.93----%)has joined the rush to snap up the last remaining oil sands projects with a cash bid for Calgary’s UTS Energy Corp. (UTS-T2.11----%) worth $3.08 a share – a 46 per cent premium to Tuesday’s closing price.

Taking UTS’s cash on hand into consideration – $355-million – the bid's cash cost to Total would come to $1.15-billion.

The UTS purchase, which was recommended by the UTS board, will give Total a 20 per cent stake in the big Fort Hills oil sands mining project, whose reserve estimate is 3.4 billion barrels of bitumen. The project is 60 per cent owned by Suncor Energy Inc. (SU-T31.23----%), with the remaining 20 per cent held by Vancouver’s Teck Resources Inc.(TCK.B-T31.68----%)

Analysts said Total’s agreement to buy UTS – after two failed attempts in the last year – may not be the end of the Fort Hills story. Suncor, they said, typically likes to take full control of oil projects and may not want to work with both Total and Teck in the long run. If not, Suncor itself might take a run at UTS or try to buy out Teck’s share in Fort Hills. A BMO note Wednesday morning said Teck’s Fort Hills ownership could be “consolidated into the Suncor/Total partnership.”

Another analyst said that Teck or Chinese oil companies could make a play for UTS. China is clearly interested in exploiting the oil sands. Earlier this week China National Offshore Oil Corp. (CNOOC) said it wanted to spend billions of dollars to expand its Canadian oil and gas presence. CNOOC’s Canadian division was one of the first Chinese companies to invest in Canadian energy when, in 2005, it paid $150-million for a 17 per cent stake in MEG Energy Corp.

In a statement, Yves-Louis Darricarrère, president of Total’s exploration and production arm, said “Total is very pleased with this acquisition of a high-quality asset that will allow us to strengthen and reorganize our asset portfolio in the Canadian oil sands. With Suncor Energy Inc., we will benefit from the experience of a leading partner, whose expertise in the mining operation of oil sands is well recognized. “

Total offer for UTS includes shares in a new company called SilverBirch Energy Corp., which will provide exposure to future growth in two early-stage UTS oil projects, called Equinox and Frontier. BMO said that if the value of the two undeveloped projects is included, the value offered to UTS shareholders rises to as much as $4.60 a share from the $3.08 in cash on the table.

Total’s two earlier bids for UTS, both hostile, were valued at $1.30 a share and $1.75.

The French company has wanted to boost its exposure to unconventional oil reserves, such as the Alberta oil sands, for some time because it believes conventional reserves – the oil that pumped easily out of the ground – will soon run short. It has said that global production will “plateau” at about 95 million barrels a day, about 10 million more than current production.

“We believe that, because of plateau oil, the oil sands are necessary to supply demand growth,” Mr. Darricarrère told The Globe and Mail last year.

Suncor’s reaction to working with Total on the Fort Hills project was not immedately known. Their relationship could work well, analysts said, if they can reach an agreement on where to upgrade the Fort Hills output. Analysts said using the mothballed Voyageur upgrader to process the Fort Hills bitumen is a possibility.

Lately, Total has been telling analysts that it admires Suncor as a good operator and corporate citizen, suggesting the UTS purchase is as much about gaining access to Suncor’s project-development expertise as it is the Fort Hills reserve itself.