Total bids for UTS Energy

Reuters, January 27, 2009 at 7:52 PM EST

French oil major Total SA launched an unsolicited $617-million takeover bid for UTS Energy Corp. Tuesday to gain a stake in the delayed Fort Hills oil sands project in Canada.

Total, which already has extensive interests in Alberta's oil sands, said it was bidding $1.30 cash per UTS share, which comes through its Canadian subsidiary Total E&P Canada Ltd., a 51 per cent premium over the small energy developer's share price over the past 30 days on Toronto Stock Exchange.

UTS's main asset is a 20 per cent stake in Fort Hills, the Petro-Canada-operated project that the partners have put on hold after costs ballooned to more than $21-billion last year.

“We believe what we're offering is good value to the shareholders of UTS. We're in a period in the oil sands which is difficult but we remain optimistic long-term about unlocking considerable value,” said Total E&P president Michael Borrell.

UTS Energy

Total SA

“Our belief is that the [oil] price will be there to make these projects economic long-term, and for us to derive value for them.”

UTS was not immediately available for comment.

Fort Hills is one of more than $90-billion (Canadian) worth of northern Alberta oil sands projects that have been deferred as oil prices fell to around $40 (U.S.) a barrel from a record above $140 last summer.

“This asset will strengthen Total's portfolio in the Athabasca region, comprising principally the Joslyn project and Northern Lights project, that are both located in the immediate vicinity for the Fort Hills project,” Total said in a statement issued late Tuesday.

UTS shares have tumbled 84 per cent in the past year, as project costs rose, oil prices fell and investors questioned the company's ability to finance its share of Fort Hills.

The stock closed down 2 cents (Canadian) at 83 cents in Toronto Tuesday. Total announced its bid after the market closed.

Petro-Canada spokesman Peter Symons said it was too early to determine what impact the Total move will have on partners' decision on whether to invest in Fort Hills, which is expected later this year.

However, he said, “under the current economic conditions facing the industry, having a major international oil and gas company like Total joining Fort Hills can only be beneficial. We would welcome them as a potential partner.”

The investment makes it clear that Total expects Fort Hills to go ahead, said BMO Nesbitt Burns analyst Randy Ollenberger.

“Clearly they're assuming that Petro-Canada and [partner Teck Cominco Ltd.] are going to come up with a viable way to push forward the project,” he said.

Total may also be banking on synergies between Fort Hills and its own plan to build a bitumen upgrader capable of processing 200,000 barrels of oil per day, Mr. Ollenberger said.

A plan to build an upgrader associated with Fort Hills was shelved last year, but Total's facility, which is not yet built, could potentially be used to process Fort Hills bitumen.

“They probably feel that their projects could help improve the viability of [Fort Hills],” Mr. Ollenberger said.

Total first arrived in the oil sands in 2005, paying $1.7-billion to buy junior Deer Creek Energy and its undeveloped Joslyn mining project. Hyper-competition for labour, and soaring costs to build such projects, then buffeted Total and the mine is still on the drawing board.

While costs to build a mine escalated, Total instead focused on expanding its future potential. Last year, it paid about $530-million for junior Synenco Energy, which owns 60 per cent of the undeveloped Northern Lights mine.

UTS is the third junior Total has snagged. It further adds to the French company's Fort McMurray portfolio. While nothing is near operating, Total is now among the largest players in the region, along with Exxon Mobil Corp., Suncor Energy Inc., Royal Dutch Shell PLC and Canadian Natural Resources Ltd. The company has emphasized a long-term view for the oil sands and by 2020, if things proceed, it could rank among the largest producers, not just land holders.

The offer for UTS could help Vancouver-based Teck which, like UTS, owns a 20 per cent stake in Fort Hills.

Burdened with $10-billion in debt, Teck is trying to sell assets, including its oil sands holdings, according to sources. The Total bid provides a hard value for its oil sands interests which mirror those of UTS.

However, the mining company's funding obligations for the Fort Hills project are greater than those of UTS. If Total's offer for UTS succeeds it could also buyout Teck's interest for a 40 per cent stake in the project over all.

On the other hand, if it is satisfied with just UTS's stake, Teck's ability to find a buyer for its oil sands holdings could prove more difficult.

“We are looking at a number of asset sales,” said Teck spokeswoman Sarah Goodman.

She declined to comment on the Total bid for UTS.

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