Suncor Energy (TSX: SU; NYSE: SU) has agreed to purchase TotalEnergies' Canadian operations through the acquisition of TotalEnergies EP Canada.
TotalEnergies holds a 31% working interest in the Fort Hills oil sands mining project and a 50% working interest in the Surmont in situ asset. This acquisition gives Suncor 100% of the Fort Hills project, which along with the Firebag and MacKay River in situ assets, provides the company with sufficient long-life, physically integrated bitumen supply in the Fort McMurray region to fully utilize the Base Plant upgraders post the end of the Base mine life in the mid-2030s. This will add 135,000 barrels per day of net bitumen production capacity and 2.1 billion barrels of proved and probable reserves to Suncor's oil sands portfolio.
The acquisition is for cash consideration of $5.5 billion, with the potential for additional payments of up to an aggregate maximum of $600 million, conditional upon Western Canadian select benchmark pricing and certain production targets. Subject to closing, the transaction will have an effective date of April 1, 2023.
When the Base mine life ends in the mid-2030s, the bitumen production from the combination of the Fort Hills and Surmont interests will effectively replace half of the current Base mine bitumen production. Replacement of the remaining Base Plant mine bitumen production will involve economic decisions assessing the highest value use of capital in the future. Surmont in situ project is operated by ConocoPhillips Canada, and upon closing, each of Suncor and ConocoPhillips Canada will hold a 50% working interest.
Under the terms of the Surmont joint venture arrangements, ConocoPhillips Canada has certain pre-emptive rights including a right of first refusal on the 50% Surmont working interest. Closing of the transaction is anticipated to occur in the third quarter of 2023 and is subject to waiver of the right of first refusal on the Surmont working interest and other customary closing conditions.
The acquisition will be funded by debt and is expected that net debt levels will temporarily exceed the company’s $12 to 15 billion target range. The company will maintain the current allocation of funds flow after dividends, capital, and non-operational benefits of 50% to debt reduction and 50% to share buybacks in line with the capital allocation framework. Suncor expects to return to within its target net debt range in 2024 based on current expected commodity prices.
"This transaction represents a major step in securing long-term bitumen supply to our Base Plant upgraders at a competitive supply cost," said Rich Kruger, president and CEO. "These are valuable oil sands assets that are a strategic fit for us and add long-term shareholder value. The acquisition also introduces flexibility and optionality into our long-range capital plan, providing us with further discretion in respect of the timing and scope of future oil sands developments,” added Kruger.