Two of Canada’s largest integrated energy companies will combine as oil-sands explorer Suncor Energy Inc., Calgary, (NYSE; Toronto: SU) plans to acquire Calgary’s Petro-Canada (NYSE: PCZ; Toronto: PCA) for approximately C$19 billion (US$15.5 billion) in a stock-for-stock transaction.

Including Petro-Canada’s year-end 2008 debt of C$4.75 billion and C$1.45 billion of cash on hand, the total deal value is approximately C$22.5 billion (US$18.3 billion).

“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” says Suncor president and chief executive Rick George, who will hold the same role with the merged entity. “The combined portfolio boasts the largest oil-sands resource position, a strong Canadian downstream brand, solid conventional E&P assets, and low-cost production from Canada’s east coast and internationally.”

The merged company will hold the Suncor name, while maintaining the Petro-Canada brand in refined products.

Suncor is offering 1.28 common shares per Petro-Canada share. The offer is 25% more than the Petro-Canada 30-day weighted-average price. On completion, Suncor shareholders will own approximately 60% of the merged company.

Petro-Canada production for 2008 was 418,400 BOE per day including 59,900 bbl. from oil sands, 240,800 bbl. from oil, and 706 million cu. ft. of gas. Proved plus probable reserves were 2.35 billion bbl. equivalent with an additional 8.9 billion equivalent contingent resources for a total 11.27 billion bbl. equivalent. Refining capacity was 255,000 bbl. daily.

Petro-Canada’s upstream operations consist of gas production in western Canada and the U.S. Rockies; oil-sands operations in northeastern Alberta; production offshore Newfoundland and Labrador; and E&P operations in the North Sea, Libya, Syria and Trinidad and Tobago.

Western Canadian gas production averaged 562 million cu. ft. per day in 2008. U.S. Rockies gas production averaged 103 million per day from coalbed-methane fields in the Powder River Basin and the Denver-Julesburg Basin.

CIBC World Markets and Morgan Stanley are financial advisors and Blake, Cassels and Graydon LLP are legal counsel to Suncor. RBC Capital Markets and Deutsche Bank are financial advisors to Petro-Canada, while Macleod Dixon LLP is legal counsel.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. value the deal at a 30% premium and suggest the merger is “a sign of the times” involving no cash and targeted C$300 million in annual operating cost savings. “This deal… could signal the beginning of stock-for-stock deals in energy land.”

Standard & Poor’s Ratings Services placed its “BBB” long-term corporate credit and senior unsecured debt ratings on Petro-Canada on CreditWatch with positive implications following the announcement.

“The CreditWatch placement reflects our expectation that the combined companies’ business-risk profile will strengthen meaningfully as a result of the increased diversification and possible operating efficiencies,” says S&P analyst Jamie Koutsoukis.

“Furthermore, as the transaction will be completed through a common share exchange, we expect the pro forma financial-risk profile to represent the sum of each company’s existing financial positions, which we believe are solidly within the ‘BBB’ rating category.”

Upon the transaction’s completion, the combined company would have more than 3.83 billion bbl. of proven reserves; an expected average daily production exceeding 680,000 BOE per day, with oil accounting for about 78% of the total average daily production; and a combined reserve-life index of more than 15 years.

“Both companies bring sizable proved developed reserves, and the combination of Petro-Canada’s relatively larger production with Suncor’s larger proven reserve base will likely strengthen the merged company’s credit profile.” Additionally, “Petro-Canada’s large downstream operations and greater geographic diversification when compared with Suncor, further improves the merged entity’s business-risk profile.”