NATHAN VANDERKLIPPE AND DEREK DeCLOET AND ERIC REGULY

Wednesday, January 28, 2009

CALGARY/TORONTO/ROME — Energy giant Total SA has stirred up Alberta's oil patch with its hostile bid for UTS Energy Corp., moving to boost its growing presence in the oil sands in the belief crude prices will recover and allow it to profit from projects now stalled.

Observers called the French company's late Tuesday bid for the junior oil player a lowball offer that could need to be raised or stoke a bidding war.

The offer riled UTS, whose stock price a year ago was four times higher than the $1.30-a-share bid from Total.

“You wouldn't even want to print what I'd like to say,” said chairman Dennis Sharp in a brief telephone interview.

Total has steadily moved to increase its oil sands presence in recent years, paying $1.7-billion to buy junior Deer Creek Energy and its undeveloped Joslyn mining project in 2005. Last July it paid another $530-million for Synenco Energy and its share of the also-undeveloped Northern Lights mine.

“Our belief is that the price will be there to make these projects economic long-term, and for us to unlock and derive value for them,” Mr. Borrell said.

However, it is the price it is willing to pay that has raised eyebrows.

Total paid about 43 cents per barrel of recoverable oil sands resource for Synenco. Once you count the carried interest and the $320-million in cash on UTS books, it is offering 21 cents per barrel for UTS, according to an analysis by UBS Investment Research.

But history has shown that the company does not consider its first bid final. With Synenco, Total boosted its offer from $9 to $10.25 a share after several major shareholders refused its initial bid.

That suggests to some observers that the UTS offer could also rise. Total has said it needs 67 per cent approval for the takeover, which will stand for 60 days.

Total's pursuit of oil sands holdings, analysts have said, is in part driven by its conviction that the world will soon run short of conventional oil. Total's website says “Scarely tapped extra-heavy oil resources are the reserves of the future.”

Unlike most big oil companies and some national and international energy agencies, Total thinks ever-rising oil production is a fantasy as major discoveries become rarer, development costs rise and monster fields, like the North Sea and Mexicos's Cantarell, run out of puff.

In late 2007, Total CEO Christophe de Margerie called the International Energy Agency's prediction that output will reach as much as 120 million barrels a day by 2030 unrealistic. Getting to 100 million barrels a day, he said, would be “difficult.”

Other Total executives have said oil production could peak between 2020 and 2030. Global consumption now runs at about 85 million barrels a day and is expected to dip slightly this year as economic growth stalls everywhere.

Canada's Desmarais family owns an indirect, 3.9-per-cent stake in Total, the world's fourth-largest publicly traded oil and gas company. The investment is held through Pargesa and its subsidiaries, which are controlled by Power Corp. of Montreal, the top company in the family's corporate pyramid.

The offer also drew a sharp response from UTS's largest investor, who said Wednesday there is no way he'll support it.

“We believe that the value of cash on the balance sheet, plus carried interest, is worth in excess of $2.61 a share,” said Greg Boland, CEO of Toronto's West Face Capital Inc. Mr. Boland said West Face owns more than 10 per cent of UTS, whose shares shot far above Total's offer Wednesday on hopes that either Total or a white knight will come in with better terms.

Michael Borrell, the president of Total's Canadian subsidiary Total E&P Canada, defended the offer, which comes at a 51-per-cent premium to UTS's 30-day share price average, as “good value to the shareholders … in a period in the oil sands which is difficult.”

UTS is widely expected to rapidly launch an auction process in hopes of achieving more favourable terms, and market watchers name a long list of potential bidders, including Asian energy companies or any of the supermajors whose balance sheets remain flush with cash.

UTS holds a 20-per-cent share in Fort Hills, a multibillion-dollar new oil sands project whose construction was delayed last year after estimated costs rose by 50 per cent. The lead Fort Hills partner, Petro-Canada, is seen as a leading contender to best the UTS offer, but a Petro-Canada spokesman said Wednesday the company is “content” with its current 60-per-cent ownership share.

The remaining 20 per cent is owned by Teck Cominco Ltd., whose shares rose Wednesday on hopes of another scenario in which Total would snap up its stake, boosting Total's ownership to 40 per cent and perhaps moving to take control of the project. According to industry sources, Teck has been searching for a Fort Hills buyer for months.

But Teck's difficulty in selling does not bode well for those who believe the UTS offer is too low, said Scott Vali, vice-president of portfolio management at CI Investments, which recently sold its UTS holdings.

“To the extent they haven't been able to find anybody, then obviously there are no other buyers,” he said. “There's less than a handful of people who have balance sheets who can step up and buy these things, so you've got limited buyers and guys who are forced sellers. So it's a buyers' market, in which case they set the prices.”

Still, those who have done the math on UTS say the value of its “carried interest” alone exceeds the Total offer, which FirstEnergy Capital Corp. analyst William Lacey called “totally opportunistic.”

That interest is the value of UTS's contract with Petro-Canada and Teck, which requires the two larger companies to pay a portion of the development costs on behalf of UTS, an amount valued at around $750-million or $1.58 a share, according to Mr. Lacey.

Along with its Fort Hills stake, UTS also holds a 50-per-cent working interest in an additional 122,667 hectares of oil sands prospective leases.

But low commodity prices have radically changed what buyers are willing to pay for oil sands projects that can't make money unless oil nearly doubles in value from where it is today. At the same time, those with oil sands holdings are caught in the credit pinch, even further lowering their ability to advance their projects.

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