Anyone interested in a well-loved oil refinery, in lovely Newfoundland?
State-run Korea National Oil Corp., or KNOC, is on the verge of owning what most energy analysts consider to be a clunker of a refinery as part of its $1.8-billion takeover bid for Harvest Energy Trust.
The facility in Come by Chance, Newfoundland has weighed heavy on Harvest's unit price since being acquired for $1.6-billion in 2006. Production of fuels has consistently missed target levels, and Harvest shelved a planned $2-billion upgrade last year in the face of the cedit crunch. Units changed hands at $35 when the deal was done three years ago, while the KNOC takeover is pitched at $10.
In the warm & fuzzy talk that always comes with the announcement of a transaction, KNOC executives are expressing their affection for all of Harvest's assets. State-owned energy entities can take a different view on assets such as refineries than public companies, as Petro-Canada once demonstrated, so it's possible the South Korean company sits tight.
However, once the deal closes and cold reality sets in, KNOC may dump this dog of a property.
The outlook for refining is weak. In a recent report on integrated oil companies, BMO Nesbitt Burns said profit margins on refining in Canada are down 33 per cent compared to last year. The investment dealers said: "We expect corporate margin capture rates to be very low, which could place significant pressure on underlying downstream earnings."
And in commentary on the KNOC acquisition early Thursday, energy analysts are focused on the value of the reserves being required, not Harvest's strategy of building an integrated energy play.
In a report out of South Korea quoted by Reuters, Jae-joong Kim, senior analyst at Woori Investment & Securities said: "The price seems reasonable, as Canada has no political risks in developments and the market usually considers around $13 a barrel appropriate average price for such deals. This deal shows KNOC seems quite aggressive."
While the refinery may be sold, it's clear KNOC is just getting started on North American acquisitions. Earlier this year, the country's political leaders said the company is expected to do a series of transactions, all aimed at building direct holdings of energy, and KNOC bulked up its borrowing capability to meet that goal.
While Harvest Energy represents KNOC's first major foray into North American oil and gas, the South Korean company does have a toe hold in the Alberta oil snds.
Andrew Willis