July 30, 2009 / 9:52 AM / in 8 years

UPDATE 2-Petro-Canada profit skids as company bids farewell

* Profit slides before Suncor takeover closes

* Layoff numbers still not known

* CEO sees weak refining business for rest of year

* Shares up 3 percent at C$44.20 (New throughout with CEO, analyst comments)

By Jeffrey Jones

CALGARY, Alberta, July 30 (Reuters) - Petro-Canada PCA.TO closed the curtain Thursday on more than three decades as a flagship oil company with a 95 percent drop in profit and a warning that its refining business faces tough times for the rest of this year.

Set up in the mid-1970s by Prime Minister Pierre Trudeau as a window into an industry then dominated by U.S. companies, Petro-Canada is set to be merged into Suncor Energy Inc SU.TO on Saturday after a C$22.5 billion ($20.8 billion) takeover.

The deal closes amid weak conditions in the oil patch. Layoffs began this week, with an undisclosed number of senior executives being informed of their status in the new Suncor, which will be Canada’s biggest oil company, with a dominant position in the country’s oil sands.

The companies struck the deal in March as the industry struggled with falling commodity prices and the credit crunch.

In his last conference call with analysts and reporters to discuss Petro-Canada’s quarterly results, Chief Executive Ron Brenneman did not say how many employees would lose their jobs. The firms are aiming for C$300 million in annual cost savings.

“Our focus is more on working our way down through the various levels of the organization and trying to get to people as quickly as we can to provide some certainty about where their future lies,” said Brenneman, who will be vice-chairman of the new entity.

“So we’re kind of dealing with this on an individual basis and we haven’t really established an overall number yet.”

Suncor Chief Executive Rick George said his company’s corporate culture will be the prevailing one.

Despite being privatized in the early 1990s, with Ottawa selling the last of its shares in 2004, Petro-Canada was never able to shake the perception that it was a bureaucratic organization with a state-run mentality, FirstEnergy Capital Corp analyst William Lacey said.

That characterization, which weighed on Petro-Canada’s stock, was largely unfair in the later years, Lacey said.

Institutional investors began clamoring for major changes to boost share value more than a year ago, even after Brenneman had made such moves as acquiring an international oil company and closing an unprofitable Ontario refinery.

He also halted the Fort Hills oil sands project when construction costs skyrocketed past C$21 billion, rather than shovel money at it as the industry downturn took hold.

“I would argue that over the last year and a half it outperformed its peers in terms of what it told the Street versus what it actually delivered,” Lacey said.

Among assets Suncor is most likely to eventually part with are Petro-Canada’s holdings in Libya and Syria, which George has said he recognized as ones whose risk investors are most uncomfortable with.

Brenneman said his relationships with those governments are solid. But investors are wary, especially after Libya blocked the sale of Canada’s Verenex Energy Inc VNX.TO, which operates in the North African country, to a Chinese company this year.

PROFIT SLIDES

In the second quarter, Petro-Canada earned C$77 million, or 16 Canadian cents a share, down from year-earlier C$1.5 billion, or C$3.10 a share. Excluding unusual items, operating earnings fell 91 percent to C$99 million, or 20 Canadian cents a share.

Cash flow sank 68 percent to C$634 million, or C$1.31 per share, as benchmark U.S. oil prices averaged $59.79 a barrel, down more than half from a year ago.

Last week, Suncor reported a quarterly net loss due to skidding oil prices, hedging losses and costs related to project deferrals.

Brenneman said he expects profit margins to remain weak in Canada’s refining sector for at least the rest of the year after the company’s refining and marketing division recorded an C$18 million operating loss.

The outlook has been further hampered by the unplanned shutdown of Petro-Canada’s Edmonton refinery in a severe storm nearly two weeks ago, which has caused fuel shortages in its Western Canadian retail network

Petro-Canada shares were up C$1.49, or 3 percent, at C$44.20 on the Toronto Stock Exchange. Suncor rose C$1.28 to C$34.60.

$1=$1.08 Canadian Additional reporting by Ajay Kamalakaran; editing by Rob Wilson

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