Total taps Fort Hills

CALGARY — French energy giant Total SA is set to snap up a coveted stake in the stagnant Fort Hills oilsands development through its takeover of minority partner UTS Energy Corp.

CALGARY — French energy giant Total SA is set to snap up a coveted stake in the stagnant Fort Hills oilsands development through its takeover of minority partner UTS Energy Corp.

Fort Hills operator Suncor Energy Inc. (TSX:SU), with a 60 per cent stake, is set to clarify its plans this year.

Recognizing the narrowing window of opportunity, Total likely acted before a potential takeout of UTS (TSX:UTS) becomes more pricey, Edward Jones analyst Lanny Pendill said.

Once Suncor comes out with a concrete update of how much Fort Hills will cost and how long it will take to build, the value the market assigns to UTS could conceivably be much richer than the price tag.

“I think from Total’s perspective, there was an incentive to act prior to those updates being made to the market,” Pendill said.

Earlier Wednesday, UTS said its board of directors unanimously agreed to sell the Calgary-based independent to a subsidiary of Total for $3.08 per share in cash, or $1.5 billion.

Less developed holdings UTS has outside of Fort Hills are to be the foundation of a new publicly traded oilsands company called SilverBirch Energy Corp.

Taking into account the UTS cash-on-hand that Total would acquire with the purchase, the net cost to the French company would be about $1.15 billion.

Total took a hostile run at UTS about a year and a half ago, ultimately walking away after its would-be target repeatedly rejected its offer as too low, even after it was bumped from $616 million to just under $830 million.

“They’re probably sorry that they didn’t act with a little more expedience,” said Caldwell Securities portfolio manager John Kinsey in Toronto.

UTS chief executive officer William Roach told analysts on a conference call Wednesday that the tone between his company and Total was “always very professional and cordial.”

“I had one disagreement with them: the price,” he said.

“I think today is really a reflection of patience and good manners, actually, on both sides.”

Total president Yves-Louis Darricarrere called Fort Hills a “high quality asset” that will help the company “strengthen and reorganize” its oilsands portfolio.

The French company said in a statement Wednesday it is considering whittling down its stake in the Joslyn oilsands mine from 75 to 50 per cent. Total also has a half-interest in the Surmont and Northern Lights oilsands projects.

UTS initiated the Fort Hills project several years ago and then sold a majority stake to Petro-Canada, which has since merged with Suncor.

In the fall of 2008, Petro-Canada disclosed that the price tag for Fort Hills had skyrocketed and shelved the project. Shares in UTS sharply plummeted on the news.

“At that stage there was a huge mismatch between value of the asset and market perception of the company,” Roach said.

Teck Resources Ltd. (TSX:TCK.B), Fort Hills’ third partner with a 20 per cent stake, was originally brought in to offer mining expertise Petro-Canada didn’t have at the time.

But with Suncor — the most established oilsands miner — now in charge, Teck’s future role in Fort Hills is unclear.

“To me, it’s questionable as to what value Teck brings to the table. I think it’s really going to come down to whether Teck wants to remain a partner in this project,” Pendill said.

“I’m sure there’s other parties out there, particularly naming the Chinese firms, that could have an interest in Teck and that ownership if it were put up for sale.”

Total may also be interested in buying out Teck’s share if the Vancouver-based miner wants to sell, Kinsey said.

“They may want to focus maybe entirely on … mineral mining rather than energy mining,” he said.

The deal requires the approval of two-thirds of UTS shareholders at a special vote in expected in September. A major investor, West Face Capital, has given its blessing to the transaction.

The deal also requires Ottawa’s approval.

“I think what is clear from the action of Total, the action of other investors, other international companies, is that there is a great deal of confidence in the Canadian oilsands,” federal Environment Minister Jim Prentice told reporters in Calgary on Wednesday.

The shareholders of UTS would own 100 per cent of the new company, SilverBirch, which will get half of the Frontier and Equinox projects as well as interests in leases and undeveloped lands. Teck is a 50 per cent partner in Frontier and Equinox.

“This is a great platform to start off a new company. I can tell you there’s a significant level of excitement in both the management team and the board of directors on how all this is going to play out,” Roach said.

He said he wouldn’t hazard a guess on how much SilverBirch’s shares will fetch when it does an initial public offering, but insisted the amount would ultimately undervalue the assets it holds.

“Because I’ve been in this company for about six years, and (in) the last two years that appears to be endemic in the way we’ve traded, which is really the catalyst for why we’ve decided to take the route we have,” Roach said.

UTS shares soared $1.33 or 63 per cent to $3.44 on the Toronto Stock Exchange Wednesday.