3 Reasons Canadian Oil Sands Ltd. Should Have Accepted the $4.5 Billion Bid From Suncor Energy Inc.

The bid from Suncor Energy Inc. (TSX:SU)(NYSE:SU) is probably the best that Canadian Oil Sands Ltd. (TSX:COS) can do.

| More on:
The Motley Fool

In a move that was not unexpected, Canadian Oil Sands Ltd. (TSX:COS) formally rejected a $4.5 billion offer from Suncor Energy Inc. (TSX:SU)(NYSE:SU). This comes after COS adopted a poison pill last week, one that will last longer than Suncor’s bid.

But the COS board is playing a very dangerous game. We take a look below at three reasons why they should reverse course and accept the Suncor bid instead.

1. We’re unlikely to see a higher offer

In a conference call Monday morning, COS management identified 11 reasons to reject Suncor’s bid. One of them is that “the Board of COS and its advisors continue to examine alternatives.” In other words, they are expecting a higher offer to come, either from Suncor or from another company.

But that is very unlikely to happen. As we all know by now, there are plenty of companies looking to sell themselves, and very few companies looking to buy. So, if you’re running an oil company and are looking to make an acquisition, there’s no reason to start a bidding war with Suncor.

Likewise, it’s unlikely that Suncor will make a higher offer. The company has already offered a 43% premium, and doesn’t want to send any messages of weakness. Besides, Suncor will probably try to acquire other companies in the near future, and certainly doesn’t want to encourage them to mimic COS’s approach.

2. The outlook doesn’t look good for oil

COS’s management rightly points out that the company offers higher leverage to oil prices. This should make perfect sense. Suncor has a large downstream business (refining and gas stations), and also has relatively little debt.

But is that really such a good thing? As 2015 drags on, evidence is mounting that oil prices aren’t recovering any time soon. And that could be a major concern for the company, especially given its high debt levels.

3. A sudden, steep drop

If COS rejects Suncor’s bid and no higher offers are made, then it won’t be pretty for COS’s shareholders.

To understand what this would look like, one only has to look at what happened to Pacific Exploration and Production Corp. (TSX:PRE). The company received a takeover offer worth more than $2 billion, but rejected the bid, claiming it significantly undervalued the company. As a result, its share price decreased by more than 45% in one day. The same thing could easily happen to COS.

So, if you hold COS stock and are looking for exposure to higher oil prices, you should sell your stock now. Then you can buy any number of levered oil producers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »