Hunting for Bargains

There is a sorely needed encouraging message between the lines of the uninvited takeover bid by the French oil empire, Total SA, for Alberta home-grown oil sands project sponsor UTS Energy Corp

By Gordon Jaremko

February 02, 2009

One of the biggest, most sophisticated petroleum giants on the planet plainly figures that oil prices, asset values and shares are at or near bottom, making this the time to go hunting for bargains that own resources with a future. This is an outfit with connections and knowledge about economic conditions just about everywhere oil and gas are produced and consumed. As the world’s fourth-largest investor-owned petroleum firm, Total has 96,400 employees and operations in 130 countries.

The core asset of UTS is 20 per cent of an Athabasca oil sands mining project, Fort Hills, with currently estimated resources of four billion barrels. Total, which already has interests in three other oil sands developments, stands to gain 800 million barrels if the takeover succeeds.

The opening bid $1.30 per UTS share, or a total $617 million works out at first blush to 77 cents a barrel. But the offer is much less, because UTS as a package includes an estimated $320 million in working capital on hand in the company as of year-end 2008. Taking that cash and the estimated resources in other UTS properties besides Fort Hills into account, financial analysts at Canaccord Adams calculate that Total is offering 14 cents a barrel for the whole package. UTS has a 50-per-cent interest in 1,227 square kilometers of oil sands leases outside the Fort Hills property.

The French company’s bid announcement makes it plain that, regardless of delays and work on redesigning projects to adapt to reduced energy prices, international interest in the oil sands is far from dying. “This acquisition is in line with Total’s strategy of optimizing its heavy oil operations in the Athabasca region, an industry segment with significant long-term development potential,” the statement said.

Far from shelving its programs, Total says it is “re-analyzing the costs, technology choices and structure” of its Joslyn mega-mine project, and working out a new schedule.

The company is also moving ahead on its entry in the lineup of bitumen processing plants proposed for the potential upgrader alley district northeast of Alberta’s capital city. “Engineering studies for the upgrader project situated near Edmonton, which is designed to process the bitumen from the various oil sands projects that Total is involved in, are continuing as planned,” the takeover bid announcement said.

Canaccord speculated that the French offer has potential to set off a bidding contest. Possible rivals for UTS include Fort Hills project senior owner Petro-Canada, Royal Dutch Shell, Marathon Oil, and Canadian Natural Resources, the investment house suggested. A third partner in Fort Hills, troubled mining giant Teck Cominco, might be drawn into the action by offering to sell its interest, Canaccord added. If a bidding contest develops, it will be a demonstration that Total is not alone in seeing a current opportunity and an eventual return of economic good health.

There is a less happy side to the evolving takeover transaction too. UTS is one in a handful of home-grown firms that for a time broke an old pattern of only international giants and their Canadian affiliates being able to afford to participate at a significant level in building new oil sands developments. Canadian Natural Resources, Nexen and OPTI managed to get their projects all but completed and within sight of going into production before the mid-2008 oil price drop. One unanswered question raised by the Total move is whether those Canadian firms are going to be the first and last of a home-grown breed of big oil sands developers.

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