China’s Energy Growth Momentum

Jim Trippon  |

Sinopec, China Petroleum and Chemical Corp. (SNP), through one of its units purchased Canadian oil and natural gas company Daylight Energy (DAY.TSX) last week for $2.1 billion. In addition to this, Sinopec has completed a deal for an 18 percent share in an Indonesian deep water project from Chevron (CVX) for $680 million. The deals show that China continues to move forward along the energy front, as its economic growth continues to add to its greater energy demand.

For its part, Sinopec, as an integrated oil company in China, has sought to become more of an international player via overseas acquisitions. The field of play is completely global and China wants to expand its place in the rich oil and gas reserves. Sinopec spent $4.65 billion to buy a nearly 10% stake in the Syncrude project in the oil sands of northern Alberta, Canada last year. Syncrude is the world’s largest synthetic crude project, which is upgraded oil extracted from bitumen, or oil tar, as well as sometimes from shale. Other Chinese oil companies, such as offshore producer CNOOC Ltd. (CEO), are in the acquisition game, too, as it acquired OPTI of Canada for $2 billion.

Sinopec Gas Station

Source: Reuters Pictures

Sinopec is seeking to balance its heavy downstream or refining operations with more upstream or exploration and production operations. The Daylight Energy deal illustrates just how far China is willing to go to service its energy needs. Much of the interest China has in Daylight is for its natural gas, but the Sinopec deal also gives the company a stronger footprint in Canada, particularly western Canada. The deal was made through its Sinopec International Petroleum Exploration and Production Group (SIPC) unit. Sinopec agreed to an all cash deal for roughly C$2.2 billion (US$2.1 billion), which equates to C$10.08 per share. The implied premium is 43.6% over the 60 day weighted average share price of Daylight’s shares up until October 7. The premium Sinopec is paying is nearly double the share price that Daylight was trading for on the Toronto Stock Exchange at the time of the deal. Still, Sinopec is getting Daylight at a relatively low EBITDA of 9.4, compared to the 13.5 times EBITDA other similar deals have gone for.

It’s one thing to think of China’s oil companies expanding their footprint in Canada, but another to understand the vast field of play there. The oil sands fields in Alberta, Canada, is a huge field of unconventional oil deposits. It covers an area that is actually much of northern Alberta. The oil sands only became commercially viable on a large scale in the last several years, even though it has been explored since 1967. The amount of deposits of bitumen, or oil tar, which requires a different exploring and refining process, one more difficult than conventional techniques with more extensive refining necessary, potentially alters the global balance of who has the most oil reserves. With the oil sands field, Canada has become the number one supplier of oil to the US, ahead of Venezuela and Saudi Arabia.

Sinopec Group, the parent company for SIPC as well as Sinopec, recently announced through its chairman Fu Chengyu that it would be looking for more overseas acquisitions. While China’s continued growth in energy demand has fueled this need, the falling prices of crude oil as well as the declining stock prices of overseas gas and oil companies and their assets has made such acquisitions more attractive. Analysts expect even more deals in the near term as China’s oil companies also have plenty of cash to buy such assets.

Oil Rig Worker At Sinopec’s Shengli Oil Field, Dongying, Shandong

Source: Reuters Pictures

It’s noteworthy that Sinopec has returned to the Indonesia fields via its Chevron deal, fields it left in 2006. As for the Daylight deal in Canada, Sinopec now has access not only to vast acreages of the oil and gas fields active in western Canada, but access to shale gas deposits which will be accessible through multiple means, including fracking. Natural gas tends to be a more local energy resource than oil or another energy resource, coal. Oil and coal are more easily shipped, but China’s interest in natural gas in western Canada is intriguing. With liquid natural gas, or LNG, storage and transport can be done for long distance, though costs are still high. The approved Kitimat LNG terminal for British Columbia would allow for shipment to Asia, including China.

Every day, China becomes a more committed and important player in the global energy game.

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