Suncor Energy has agreed to buy rival Petro-Canada to create Canada's largest oil company, as the pair seek to tackle tough conditions in the oil sands industry by slashing costs.

Suncor will pay C$18.43 billion ($14.9 billion) for PetroCanada in the all-share deal which targets $1.3 billion in savings after soaring costs and plummeting oil prices made it hard to turn a profit from squeezing crude out of tarry soil.

The deal comes after a period of missed earnings targets and a project delay at Petro-Canada and is expected to be completed in the third quarter of 2009.

Petro-Canada shareholders will receive 1.28 common shares of the merged company for each Petro-Canada share, while Suncor shareholders will get one common share of the merged company for each Suncor share.

This represents a premium of about 28 percent to the C$29.65 closing price of Petro-Canada shares on Friday, assuming there were 484.4 million Petro-Canada shares outstanding as of Dec.
31, 2008.

On completion of the deal Suncor's shareholders will own about 60 percent of the merged company, the companies said, and they expect to achieve annual operating expenditure reductions of $300 million.

They also expect to achieve annual capital efficiencies of about $1 billion through the elimination of redundant spending and targeting capital budgets on high-return, near-term projects. - Reuters