Suncor Energy (SU) has announced plans to acquire one of its rivals Petro-Canada (PCZ) in a US$15 billion all stock acquisition.  The merger will create the largest Canadian energy company, at a time when oil is rising above $50 per barrel, up 10% last week and another 3% so far on Monday.  Canada is rich in natural resources with fairly substantial amounts of crude oil; however, much of this oil is in oil sands which can be more expensive to produce.  This deal will provide C$1 billion in capital expenditures synergies and possibly as much as C$300 million of general and administrative operating cost savings.  These cost savings should allow the combined company to be more aggressive in producing the oil sands.

The deal represents approximately 25% premium to Petro-Canada’s share price, and at this point the market is reacting positively on both of these companies.  Petro-Canada is trading up more than 26% and Suncor is up slightly this afternoon.  Petro-Canada’s shareholders will reportedly receive 40% of the new venture with Suncor’s getting the remaining 60%.  The company will retain the Suncor name in general but will retain the strong brand recognition of Petro-Canada in refining.

We think this acquisition makes sense, as our valuation on PCZ has remained Undervalued since last summer.  The stock has been trading a price-to-sales and price-to-cash flow at levels that are far below the historical norms.  With major M&A deals happening basically daily at this point, it is a strong sign that at least some companies are optimistic about the future.  It also suggests that Suncor doesn’t anticipate oil going back down to the $30’s in the near future.