China's biggest refiner sees something in the oil sands that the rest of us are missing, as the company paid a massive premium on Monday for a 9 per cent stake in Syncrude Canada Ltd.
State-owned China Petroleum & Chemical Corp., better known as Sinopec, agreed to pay $4.65-billion (U.S.) for a 9 per cent stake in Syncrude owned by ConocoPhillips. The U.S. oil company put the holding up for sale last October as it moved to pay down debt.
There were at least two credible domestic bidders for the Syncrude stake, but neither was willing to offer ConocoPhillips anything close to what Sinopec paid. Those bidders were a coalition of several large pension funds, and Calgary-based Canadian Oil Sands Trust, which already owns 36 per cent of Syncrude.
Here's some simple math to explain just how highly Sinopec values Syncrude, which claims 5.1 billion barrels of proven and probable oil reserves.
Canadian Oil Sands units are soaring Monday on news of the Sinopec offer, because the trust was widely expected to win this auction, and dilute existing investors by issuing new units to pay for the purchase.
Event after rising 6 per cent in Toronto Stock Exchange trading on Monday, Canadian Oil Sands and its 36 per cent stake in Syncrude translates into a market capitalization of $15.8-billion. Add in debt at the trust, and the total enterprise value of Canadian Oil Sands is $16.8-billion.
Sinopec is paying $4.65-billion for a stake in Syncrude that's a quarter the size, so if the Chinese company had the right call on valuation, Canadian Oil Sands should boast an $18.6-billion market capitalization.
On this metric, Sinopec is paying 10 per cent more for a minority slice of Syncrude than Canadian public markets say the company is worth. It would be extremely difficult for Canadian Oil Sands to justify paying this price for additional exposure to Syncrude. Using the valuation of its own units as a guide, the domestic trust would have bid $4.2-billion.
So full marks to ConocoPhillips advisers for getting top dollar for this asset: Credit Suisse was the financial adviser, and Osler, Hoskin and Harcourt did the legal work.
Of course, there are two ways to look at the Syncrude valuation. Those with faith in public markets would say Sinopec just overpaid. It's also possible to argue that public investors do not recognize the long-term strategic value of the oil sands.
When it comes to the pension funds' bid for ConocoPhillips stake In Syncrude, talk in Calgary finance circles on Monday has the Sinopec offer coming at a far higher price than what the local money managers put on the table. This coalition of Canadian public sector pension plans included the usual suspects: Ontario Teachers Pension Plan and the like.
There is chatter that the pension fund coalition suffered setbacks in the last stages of the bidding process, with one of the funds opting to pull out, but the issue is now all but academic, as the price contemplated by domestic funds was well below the winning bid.