Oil Sands Takeover Rush?

Since Royal Dutch Shell put forward its $7.7 billion bid for the remainder of outstanding shares of Shell Canada, oil sands in Alberta could again become the target of potentially very intense international takeover rush. Next could be Syncryde Canada Ltd., which is majority owned by Canadian Oil Sands Trust, and Imperial Oil, which is majority owned by Exxon Mobil Corp. Let me also say that independent names aren’t out of the shooting range either, including Suncor Energy Inc., Canadian Natural Resources Ltd., Nexen Inc., and EnCana Corp.

Why this renewed interest is hardly a mystery. In the world of depleting fossil fuel resources, Canada holds a unique place. Our reserves are enormous, forecasted to reach 4.5 million barrels per day by 2015. Currently, oil sands are pumping 2.5 million barrels per day. Meaning, in less than a decade, Canada could become the world’s fourth largest oil producer, behind Saudi Arabia, Russia, and the U.S.

Some experts think that Royal Dutch Shell takeover bid could actually be just the first in the string of consolidations within the oil sands sector. How come? Simply, large producers are running out of their own resources and are looking for new, fields, preferably in low risk, politically stable regions such as Canada.

Naturally, one takeover does not consolidation make! Oil sands come with a huge price tag, which could potentially quash the entire consolidation gig. For example, currently Suncor has a market cap of about C$39.0 billion. To make it an attractive takeover bid, a potential offer would have to come with some serious dough, roughly in the C$50.0 billion range–and that’s not even counting the “what if” scenario in case the bid turns hostile. To put things into perspective, the entire bid for Inco Ltd. by Brazil’s Compania Vale do Rio Doce totaled $19.0 billion.

In addition, Royal Dutch Shell may have an ulterior motive for the Shell Canada bid. Several years ago, the company went through a rather embarrassing period when it had to publicly admit its reserves were much smaller than originally calculated. So, it may just be that Royal Dutch is on the warpath to rebuild its reputation and biff up its reserves.

On the other hand, oil sands are still fairly under explored and major staking has not happened yet. It is also true that large producers are running out of steam as their resources dwindle, particularly in the U.S.

In my humble opinion, the money to consolidate oil sands is out there. The variable, which may have the most impact whether the oil sands takeover rush will pan out or not, are crude oil prices. Extracting crude from oil sands costs more money than traditional exploration efforts and it is justifiable only when crude pries are high.

Recently, oil prices took a hit. However, the OPEC has decided to cut the daily oil production to give prices a push in the right direction. As long as oil prices rise, large oil producers will keep their focus on oil sands.

What could potential consolidation in the oil sands sector mean to investors? Well, I’m not telling you to load up on shares of potential takeover targets. But, history tends to repeat itself, and in the past, takeover targets went through huge price appreciation when there were even rumors of takeovers, let alone legitimate potential.