Korea National Oil Corp. (KNOC), sitting on a multi-billion-dollar warchest, is setting its sights on Canada as the state-owned company aims to ramp up production and catch up to Asian rivals.
Seoul said this month that cashed-up KNOC will spend $6.5-billion (U.S.) on M&A in 2010 in an effort to cut South Korea's almost total dependence on imported oil. That goal will put the company in direct competition with Asian energy giants such as PetroChina, Malaysia's Petronas, and India's ONGC.
KNOC may be eyeing assets offered by such Canadian companies as its top oil firm Suncor Energy , No.2 independent petroleum producer EnCana Corp. and No.3 independent oil explorer Talisman Energy , UBS said in a recent report.
In addition, Canadian oil sands company Opti Canada and its peer Nexen Inc. are seen as potential acquisition targets. Their shares moved up as recently as late last year on speculation of bids from Chinese energy giants. So far, no public offers have emerged.
"KNOC, Sinopec - they are all here and they are all looking at Canadian oil and gas," an investment banker at a major Canadian bank told Reuters. "I guarantee you will see some M&A activity in Canada this year. The government is being very welcoming."
Oil Sands
Alberta's oil sands are the largest deposits of crude outside the Middle East, although extraction can be difficult and expensive.
KNOC needs to seal a deal with a sizable oil firm within six months to boost production to 300,000 barrels of oil per day by the end of this year, bringing forward its target by two years, chief executive Kang Young-won has said. KNOC's current production is about 129,000 bpd.
Canada is not unknown turf for KNOC, having sealed a $1.7-billion takeover of Canada's Harvest Energy in October.
According to investment bankers familiar with the company and its plans, KNOC is eyeing more opportunities in Canada.
"Canada is very friendly to acquisitions by foreign investors - it would be the country to look at, especially with lots of oil sands projects now being valued very cheaply," said Gordon Kwan, head of regional energy research at Mirae Asset Securities.
Next Target
In November, Opti said it was looking at a possible sale of the company, which is heavily indebted. It needs cash for planned future phases in the development of its Long Lake oil sands project.
"We're well underway but .. it's not a near-term event," chief executive officer Chris Slubicki told Reuters in an interview on the sidelines of the TD Newcrest oil conference in London earlier this month.
"Opti is too small a company to undertake future phases alone," Mr. Slubicki added.
China has already made a strong push into Canada's oil sands, and is widely expected to seek more deals this year. In August, PetroChina agreed to pay $1.8-billion for the purchase of majority stakes in projects planned by Athabasca Oil Sands Corp in Alberta.
In 2006, KNOC made a foray into that part of the business by acquiring an oil sands property in Canada from Newmont Mining Corp.
But full takeovers aren't the only option on KNOC's menu. The company is also interested in asset deals - buying portions of large companies with significant output.
"KNOC is looking at various options - it could be a single large deal or they can go for smaller deals to meet the target," said a Korean government source who is familiar with KNOC's strategy but was not authorised to talk to the media.
A KNOC spokesman declined to comment when contacted by Reuters.
Stiff Competition
Among the factors fuelling competition is the strengthening of some Asian currencies against the dollar, most notably China's, which give buyers the power of paying a higher price.
"If the Korean won can still strengthen against the U.S. dollar, then it will accelerate their acquisition pace," said Mr. Kwan of Mirae.
KNOC's M&A ambitions are at the heart of South Korea's drive to invest a record $12-billion in overseas resources assets this year, as the country seeks a secure energy supply.
That drive is backed by the state's commitment of 19-trillion won ($16.7-billion) investment in KNOC and buoyed by recent success in a series of M&As, including the Harvest Energy deal October.
However, KNOC hasn't fared well in competitive bids for international assets, trumped by Sinopec Group's $7.24-billion buyout of Switzerland's Addax Petroleum last year.
KNOC also lost to Italy's ENI in 2007 in its attempt to buy UK-based Burren Energy.
Analysts caution there may be fewer attractive assets on the market following a flurry of energy deals last year.
What is more, with oil prices and capital markets rebounding as the global economy emerges from the financial crisis, independent oil companies will also be jumping into acquisitions, which will ratchet up prices and competition, as ratings agency Moody's Investor Services noted on Monday.
"KNOC...faces the risk of overpaying...due to competition from other state-run energy firms and independent E&P companies, a limited number of potential acquisition targets," Moody's analyst Renee Lam said.