Updated from 3:13 a.m. EDT

Suncor Energy ( SU) has agreed to acquire Petro-Canada ( PCZ) for $15.5 billion to create Canada's largest energy company.

The announcement from the companies confirms earlier published reports.

"This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," said Rick George, Suncor's president and CEO who will assume the same role with the merged entity. "The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada's east coast and internationally."

Under the terms of the deal, Petro-Canada shareholders will receive 1.28 common shares of the merged company for each common share of Petro-Canada they own. Suncor shareholders will get one share of the new firm for each Suncor share they own.

The exchange ratio represents a roughly 25% premium to the average share price of Petro-Canada over the last 30 days, the companies said.

Once the deal closes, Suncor's shareholders will own about 60% of the merged company, while Petro-Canada shareholders will own about 40%.

The merged company estimates cutting annual costs by $300 million (Canadian)by streamlining its business and reducing overlapping operations.

The board of both companies support the deal.

The Journal reports the all-stock deal would allow the companies to merge while conserving cash, a sign of the pressure some oil producers face amid the plunge in crude prices since last summer. The Canadian government, which could veto the deal, has signaled its support, the Journal adds, citing people familiar with the matter.

Shares of Petro-Canada closed Friday at $24.01, which means under the deal the shares are being valued at $30.73.

The transaction creates Canada's biggest energy company with a market value of $35 billion, surpassing the market value of EnCana ( ECA), the current leader, according to Reuters.

A merger of the two companies would combine Petro-Canada's extensive retail gasoline and refining business and its international operations with Suncor's extensive operations in oil sands, where it is the No. 2 producer behind Syncrude Canada, according to Reuters.

Oil-sands production is a type of exploration that generally involves mining tar-like sands and converting them to usable oil, according to the Journal. When oil prices were high, many producers scrambled to cultivate rich oil-sand fields in Canada's Alberta province.

The method, however, is more expensive than conventional production and most such projects are uneconomic at current price levels. In November, Petro-Canada said it was delaying one project because of falling prices.

"The merger will be good for shareholders of both companies with reduced capital requirements, operating efficiencies and complementary integration opportunities between upstream and downstream assets," said Ron Brenneman, president and CEO of Petro-Canada. He will become executive vice chairman in the merged company.

Copyright 2008 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed. AP contributed to this report.

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