Chinese energy giant Sinopec International Petroleum Exploration is testing the waters on a bold new energy strategy in Canada, as it moves to buy out an Alberta oil and gas company for $2.2-billion in cash.
Sinopec’s bid for Daylight Energy Ltd., whose large portfolio of Alberta and British Columbia land contains potentially significant quantities of natural gas, comes amid a new push by Asian firms to lock up Canadian energy that could soon be loaded onto tankers and shipped across the Pacific.
But the Daylight deal marks a departure from previous Chinese acquisitions, which have been carried out with a deliberately soft touch, fashioned to avoid a nationalistic backlash by buying only small portions of other companies, or scooping up troubled firms.
Now, however, Sinopec is cementing a new trend that has seen Asian entities seek greater control in their North American investments. In buying Daylight, Sinopec is assuming a newly confident stance in Canada, where it has operated since 2005.
“This is breaking new ground,” said Wenran Jiang, an expert on Asian energy investments in Canada who holds a research chair at the University of Alberta's China Institute.
Sinopec must still win over Daylight shareholders, who will receive $10.08 a share, more than double Daylight’s $4.59 Friday closing price. The company also needs to secure the approval of Canadian federal authorities. Under the Investment Canada Act, all direct foreign acquisitions over a set amount – the threshold was $299-million in 2010 – trigger a review by the Minister of Industry, who has 45 days to determine whether or not to allow the investment.
If it succeeds, Sinopec will have opened an important door to expanding Chinese activity in a country whose resources and stability are increasingly coveted by foreign powers.
“The message here for the Canadian oil industry is that China has a good appetite, China is willing to invest in a wide range of our energy sectors,” Mr. Jiang said.
The Daylight deal is not the first outright takeover of a Canadian company. Earlier this year, CNOOC Ltd. agreed to take over OPTI Canada Inc., and Sichuan Bohong Industry Co. moved to buy car parts maker Wescast Industries Inc. But in both of those cases, the Canadian entities were struggling financially. In the case of OPTI, the company’s principal asset was a minority stake in a large oil sands project. In another buyout, the $2-billion purchase of Tanganyika Oil Co Ltd, Sinopec acquired a company whose assets lay outside of Canada.
The Daylight deal is far different, and comes amid a broader trend that has seen Chinese firms turn away from the oil sands, with their enormous costs and environmental risks, and toward so-called “conventional” oil and gas purchases.
The advent of potent, though costly, new drilling techniques has also saddled Canadian companies with more natural gas opportunities than they can finance. Daylight, which has struggled against debt worries and whose executives declined comment, has enough land to drill 100 wells a year for more than two decades. Sinopec brings an enormous wallet to pay for the kind of rapid drilling pace that could double or triple the size of Daylight’s 38,000 barrel-a-day current output, roughly two-thirds of which is gas.
And gas has proven even more attractive as it becomes increasingly clear it will be the first energy product that Canada regularly exports to Asia. One liquefied natural gas export project backed by two U.S. firms and Canadian gas giant Encana Corp. has already begun clearing land for construction near Kitimat, B.C.
“Kitimat LNG is a huge eye-opener for anyone that’s got a vision of five years or more in Canada,” said Rob Lauzon, senior portfolio manager with Middlefield Capital Corp., one of Daylight’s largest owners. He supports the Sinopec purchase.
“They’re not buying Daylight for what’s happening in the next six months. They’re buying Daylight for their five and 10-year plan.”