TotalEnergies is moving full steam ahead with a plan to spin off its oil sands and related Canadian assets into a new entity, assuming shareholder approval in late May.
The French major provided further details of the planned divestment in its fourth quarter earnings report in early February. In late January, the company announced its Canadian affiliate would be purchasing an additional stake at a fire sale price in the Suncor-operated Fort Hills oil sands mine from Teck Resources—as the Vancouver-based miner also retreats from the oil sands—in what appears to be an effort to bulk up its assets and make the IPO more enticing.
Oil sands spin-off
“TotalEnergies confirms its project to spin off its affiliate, Total Energies EP Canada, by listing it on the Toronto stock exchange,” the latest earnings report says. “TotalEnergies intends to retain a 30pc stake in the listed entity and to distribute 70pc of the shares to TotalEnergies SE’s shareholders, through a special dividend in kind. This transaction would be subject to the approvals that will be taken by the General Assembly of TotalEnergies on 26 May 2023.”
Assuming the IPO goes forward, the new public company will own a 31.2pc interest in the Fort Hills mine, a 50pc stake in the Surmont in situ project operated by ConocoPhillips, and assorted pipelines and trading operations. The new company should produce c.100,000bl/d, similar to MEG Energy, a second-tier oil sands producer, but it is expected to have a substantially lower equity valuation of C$2–3bn ($1.5–2.25bn) versus C$6.8bn, because TotalEnergies is expected to shift some of its debt to the new entity.
The French firm originally announced plans to spin off its oil sands-related assets in September. “We are not the best shareholder of these assets because, as we have a climate strategy, we do not want to invest in these assets,” Patrick Pouyanne, the company’s CEO, said at the time.
On that note, TotalEnergies is only planning to retain the 30pc stake in its Calgary-based offshoot as long as it takes to smooth the new company’s transition, according to Pouyanne. The French major has been retreating from the oil sands since at least mid-2020—when it took a $9.3bn impairment charge on its northern Alberta assets—following in the footsteps of many other IOCs, including BP, Shell, Houston-based Marathon Oil and Norway’s Equinor.
In January, TotalEnergies agreed to pay C$312mn to buy an additional 6.65pc stake in the 194,000bl/d Fort Hills mine from Teck, valuing the mine at a mere C$4.7bn—about a quarter of its construction cost.
Suncor had announced an agreement in October to buy Teck’s full 21.3pc stake in the Fort Hills mine for approximately C$1bn, which would have increased Suncor’s majority stake to 75.4pc. But in December, TotalEnergies filed an application in the Alberta Court of King’s Bench challenging the deal, arguing the right of first refusal to acquire a portion on a pro rata basis.
“By seizing this opportunity to grow its business under attractive conditions, TotalEnergies EP Canada will deliver value to the future shareholders of the spin-off entity,” the company’s CFO, Jean-Pierre Sbraire, said on 27 January.
In interviews with Petroleum Economist, Kevin Birn, chief Canadian analyst at intelligence firm S&P Global Commodity Insight, and Jonah Resnick, an analyst with consultancy Wood Mackenzie, generally agreed with Sbraire’s assessment of the deal. TotalEnergies did not want Suncor to get all of Teck’s Fort Hills asset “for a song”, according to Resnick.
“Size matters, especially in the oil sands,” says Birn. “The bigger stake in the Fort Hills mine makes TotalEnergies’s spin-off more attractive to investors.”