Under the radar
Five years after Ottawa put the brakes on a surge of foreign investment, China is back. A new wave of Chinese investors is quietly snapping up a host of energy companies in the wake of the industry slump. Jeff Lewis, Jeffrey Jones and Nathan VanderKlippe report on a stealthy takeover binge in the oil patch
The aging ranch-style house in suburban Calgary with the view of the Rocky Mountains doesn't look like a beachhead in a new wave of Chinese investment in Canada's oil patch. The intercom at the foot of a looping driveway is broken. Scraps of wood and old camping chairs lay about cracked asphalt. The roof shingles are weathered and starting to cup.
But for a time, it served as the Canadian headquarters of Shanghai Energy Corp., at least on paper. Last fall, Shanghai Energy and an affiliated numbered company also listed at the Springbank-district address bought oil and gas properties from Endurance Energy Ltd., a Calgary-based producer that, unable to pay its bills, sought bankruptcy protection in the spring of 2016. It owed banks roughly $221-million.
The deal's backers are among a new breed of Chinese investors who are plowing fresh funds into Canadian energy companies in a takeover binge that has largely escaped public notice.
Feasting on assets from debt-hobbled domestic producers and companies in receivership, a handful of well-connected Chinese financiers and oil executives has spent nearly $2-billion in a series of deals since Ottawa imposed restrictions on buying by state-owned enterprises in 2012, a move thought to have soured China on the Canadian oil patch.
Spyglass Resources Corp., New Star Energy Ltd., Twin Butte Energy Ltd., Hyperion Exploration and other small to mid-size oil and gas producers have been snapped up with private Chinese capital amid the energy-industry downturn.
The investors and several go-betweens who scout out opportunities and enlist overseas capital guard their privacy closely and tend to look for deals that are below the value that would trigger a review by Investment Canada, a Globe and Mail investigation found.
Investment bankers say groups of such suitors, who operate outside the confines of big-name state oil companies, such as PetroChina, CNOOC Ltd. and Sinopec, have turned up at most recent asset sales in Calgary, using various corporate names.
In an indication of how new some of the players are to Alberta and its main industry, several have registered companies in suburban homes before taking up space in the sprawl of downtown Calgary real estate left vacant by retreating domestic rivals. Shanghai Energy, led by China-born and University of Calgary-educated financier Wentao Yang, has since relocated to an office tower alongside established energy companies while adding to its holdings.
The influx of capital, tallied through public statements, corporate registrations, court documents, confidential brokerage reports as well as interviews with industry executives and investment bankers, is led by an array of small companies that share directors and addresses, including some in the British Virgin Islands, a noted tax haven – all with origins in China.
They now employ hundreds of domestic employees and produce more than 100,000 barrels of oil equivalent a day, virtually all from conventional oil and gas deposits.
It shows that, far from disappearing, Chinese investment in Canada's oil patch has shifted from high-cost oil sands projects, which had been the target of blockbuster deals by the state-owned giants, to smaller acquisitions that garner few headlines. At least some of the buying is motivated by a desire to transfer money into hard foreign currency beyond the reach of authorities in Beijing, according to a recent proprietary report from a major Canadian bank.
That has prompted comparisons to the spike in foreign investment that enveloped Vancouver's real estate market, and pushed up housing prices to the point where the provincial government stepped in with tax measures to slow the rush. However, since the collapse in oil prices in late 2014, there has been no shortage of potential buys in energy and the flow of capital has had little distorting effect on asset values.
"You had PetroChina and Sinopec and a lot of the big companies in here buying out oil sands reserves, primarily," said Tom Buchanan, former chief executive officer of Spyglass Resources. "Now, the new wave is a lot of these family businesses, where guys have made a ton of money in China."
Spyglass was purchased in the spring of 2016 by an entity called SanLing Energy Ltd., led by chief executive officer Shuo Shi. According to corporate registration forms, the company's principal shareholders are Jeremy Song and Yuhan Song. Court documents put the price at $59.7-million, less than half the $172-million Spyglass owed lenders when the junior oil company was pushed into receivership the previous fall.
Mr. Shi is among such other active investors as Beijing-based oil executive Tianzhou Deng, chairman of Shanghai-listed compressed natural gas firm Changchun Sinoenergy Corp., and Mr. Yang. Other companies that have bought assets since the clampdown on state-owned enterprises (SOEs) have included TriWin International Investment Group and China Oil & Gas Group.
In the last decade, SOEs spent tens of billions of dollars in Canada as Beijing sought to secure reserves around the world to fuel massive economic growth.
The $15.1-billion (U.S.) takeover of Nexen Inc. by CNOOC Ltd. raised some worries, including among members of former prime minister Stephen Harper's cabinet, that control of the country's oil sands was being absorbed by arms of foreign governments, including China's. Mr. Harper approved the takeover of Nexen and its Long Lake oil sands project but ruled that further bids for control of such assets were off-limits.
China's appetite withered amid the political backlash in Canada, and operational disappointments plagued buyers, too, raising questions about whether they overpaid.
The SOE clampdown has since been raised by Beijing in free-trade talks with the Canadian government. Chinese envoys have pressed Ottawa for unfettered access to key sectors of the domestic economy, including Alberta's oil patch.
Since the oil crash, however, the influx of private money has helped Canadian lenders stem losses on soured loans that became an epidemic. Opportunities have been plentiful.
"The Chinese have a true global suite of opportunities presented to them. Every investment banker on the planet has been making their way to Beijing, Shanghai, Hong Kong for a long period of time – 15-plus years," said Adam Waterous, who made excursions to the country as a top investment banker with Bank of Nova Scotia before leaving to found Waterous Energy Fund.
"It's a well-trodden path. If you've got something in the North Sea or something in West Africa, all roads lead to China," Mr. Waterous said. "What's interesting is that private-sector Chinese investors are treating Canada frequently as a preferred destination."
Few of the players are well known and many are reluctant to speak to the media. In April, SanLing's Mr. Shi abruptly cancelled a scheduled interview, then hung up on a reporter trying to reschedule. A LinkedIn profile belonging to Shanghai Energy's Mr. Yang disappeared from the site after The Globe exchanged several messages with him.
Besides his role at Shanghai, it described him as the president and chief executive of another company called Rockyview Resources Inc. Court documents show it bought B.C. natural gas assets from bankrupt Quicksilver Resources Canada Inc. Mr. Yang is also listed as founding partner of Kailas Capital Ltd.
Privately, associates compare Mr. Yang with some of Calgary's most prominent merchant bankers, such as Brett Wilson and Murray Edwards, when they were striking their early deals in the 1990s. Known for an impressive network of investor contacts, he has figured in numerous transactions, putting capital together to buy up assets and setting up management teams to operate them.
Reached by e-mail, Mr. Yang would not discuss his investments, citing privacy concerns. "We are a private Canadian company and prefer to maintain our privacy as we are entitled, to the extent possible," he said.
He said Shanghai's parent company, China Energy Reserve and Chemicals Group Co. Ltd., is undergoing a public listing process in China, which also prevents him from making public statements.
His activity appears to overlap at times with Sinoenergy's Mr. Deng. Mr. Yang is listed in registry filings as a director at Mr. Deng's SinoEnergy Pacific Corp. and on his LinkedIn profile as a director of New Star Energy.
SinoEnergy purchased New Star in 2015 for $170-million, plus the assumption of $45-million in debt. SinoEnergy is an affiliate of Calgary Sinoenergy Investment Corp., which in turn is controlled by Sinoenergy Oil Investment Ltd., corporate registration documents show.
That company shares an address used by dozens of firms in the British Virgin Islands, a corporate secrecy and tax haven, according to a trove of leaked financial and legal documents known as the Panama Papers. Mr. Deng is also listed as a beneficiary of BVI company Priceline Investments Ltd. Among its shareholders are Qingdao Sinoenergy Corp. as well as another firm that shares a Hong Kong address with a company that controls Shanghai Energy.
The use of an offshore company by itself is no indication of wrongdoing, but it can effectively obscure a firm's true owners. In Calgary, bankers indentified New Star's acquirer as a unit of Shanghai-listed Changchun Sinoenergy, the same company that bought financially troubled Long Run Exploration in 2016.
The price tag in that deal, which required federal approvals, was $100-million, a whopping 215-per-cent-premium, plus the assumption of roughly $600-million in Long Run debt. A Sinoenergy affiliate also recently closed the acquisition of bankrupt Twin Butte Energy, paying more than $260-million.
Changchun Sinoenergy is far from a household name in downtown Calgary even though it now employs about 400 people, including contractors, and produces as much as 50,000 barrels of oil equivalent a day. And there is likely no bigger player in the oil patch who is less well known than its 60-year-old chairman, Mr. Deng.
Yet, Mr. Deng travels in distinguished company. Following a visit to Ottawa by Chinese Premier Li Keqiang last fall, a press release from Prime Minister Justin Trudeau's office touted a commitment by Sinoenergy to invest $500-million into Long Run over the next two years – an outsized sum during a slump that has forced competitors to slash spending.
A spokesman for the PMO said Mr. Deng was not part of the premier's delegation. However, photos posted on the WeChat account of the China Construction Bank show Mr. Deng at a signing ceremony with the bank's Toronto branch manager, with the premier and Mr. Trudeau in the background.
Mr. Deng oversees a growing stable of Canadian investments from Sinoenergy's head office on the 29th floor of the swooping Zaha Hadid-designed Wangjing Soho, one of Bejing's more striking office complexes. Inside, 100 staff work at cubicles. A sign near the front desk says "carrying out decisions with high efficiency, building careers."
The spending is far from over. By the end of this year, Sinoenergy expects to build up production to 70,000 barrels a day, rising to 100,000 by 2018, said Hu Hai, a consultant for the company, in an interview. That will vault the firm into "the top 20 in Canada," Mr. Hu said.
Operating from China, he said, Sinoenergy can benefit from cheaper labour and an unsentimental approach to the Canadian oilpatch, which Mr. Hu faults for getting fat on the good times. "We fired many high-level managers. We simplified management teams and reduced those costs," he said. He figures the company can turn a tidy profit with U.S. oil prices as low as $48 (U.S.).
"Why do so many oil companies lose money? It's because of heavy financial costs, property depreciation and management costs. The CEO of a small oil company might enjoy a $500,000 (Canadian) annual salary. He also has many vice presidents enjoying luxury offices. It's all very high cost."
Sinoenergy benefits from cheap capital at Chinese banks, he said, and from networks of investors with cash to spare and a desire to find a safe place for it. None of Sinoenergy's investors are in Canada, he said.
He identified Priceline as "one of our companies," used for tax purposes but also because of Canadian scrutiny on Chinese money. "Sometimes, Chinese investors have to invest in Canada by setting up a company in the BVI," he said. It is related to "passing federal government checks a bit faster." Sinoenergy has similarly worked with other Chinese companies in buying Canadian energy assets. Mr. Hu called Shanghai Energy a "partner" and said SanLing "is us."
Some oil executives in Calgary say the Chinese investors are bringing capital to an industry that sorely needs it, as other sources have moved on to other oil– and gas-rich basins, such as the Permian in Texas.
Many are also keen to establish themselves as credible operators in a mature region as oil prices begin to firm up. Some even aim to ship physical barrels of oil back to China, profiting from a new opening across the Pacific for private firms to import crude.
"They have the ability to execute a deal and close a deal," former New Star chief executive Steve Sugianto said. "They bring the money. That's pretty good."
This month, more Chinese capital snapped up oil and gas assets, located in northwestern Alberta, according to well-placed industry sources. This time, the sellers were companies in the stable of Calgary's wealthy Riddell family. Paramount Resources Ltd. unloaded $150-million worth of properties and Trilogy Energy Corp. divested $50-million worth. Jim Riddell, who is chief executive officer of both companies, declined to name the buyer when contacted for comment.
The investments are part of a wider outward flow from China's borders that has raised concerns among senior government officials in Beijing. Indeed, the demand has spawned a new sub-industry of go-betweens in Calgary who seek out potential investments then go about raising captial to buy them from their contacts in China.
Robert Kwauk, the Beijing managing partner at Blake Cassels & Graydon LLP, said he occasionally receives inquiries from what he calls "really, really small" Chinese buyers, people who identify themselves as representing investment companies or private equity funds.
"They're certainly not oil companies – they're just really no-names," Mr. Kwauk said.
But they want to know about buying small oil and gas companies in Alberta, the kind that might have only a few wells but nonetheless pump out regular barrels. That can make for favourable math.
"If you buy a house in Vancouver for, say, $3-million, you get a very average house," said Mr. Kwauk, a respected and well-connected lawyer in Beijing. By comparison, in Alberta, "for $3-million you can get a small producing asset that spins out regular cash flow."