A unit of China Petrochemical Corp. (Sinopec) has signed a deal to buy Canadian oil and gas explorer Daylight Energy Ltd. for $2.2-billion in cash, underscoring China's quest to secure enough energy to power its booming economy.
Chinese buyers have been taking advantage of depressed stock prices and a difficult fundraising environment to make deals. A combination of falling oil prices and debt levels has hit Canadian oil and gas shares in recent months as investors fret that growth prospects are shrivelling.
Sinopec International Petroleum Exploration and Production Corp (SIPC) agreed to buy Calgary-based Daylight for $10.08 per share. That is more than double the closing price of $4.59 per share on Friday, but Daylight said it is only a 43.6-per-cent premium over the 60-day weighted average trading price.
A key reason for the deal is that Daylight is predominately a natural gas company and China would like to export liquefied natural gas from western Canada, said Neil Beveridge, a research analyst at Sanford C. Bernstein & Co in Hong Kong.
Sinopec Group "will further expand its portfolio in Canada as it advances its international businesses," the company said in a statement on Monday.
With Beijing's blessing, China's big state-owned firms have aggressively moved to buy overseas assets. State energy firms in particular have the responsibility to secure enough natural resources to satisfy growing demand in the world's biggest energy consumer.
China's outbound deals in energy and mining so far this year total $26-billion, compared with $32.3-billion in the same period last year, according to Thomson Reuters data.
In July, China's top offshore oil producer, CNOOC Ltd., agreed to buy struggling Opti Canada Inc. for $34-million and $2-billion in debt and late last month, China's Minmetals Resources Ltd. agreed to buy Africa-focused copper miner Anvil Mining for $1.28-billion.
"It is quite expensive, but Canadian assets are mostly expensive, compared with assets in other regions," said UOB Kay Hian analyst Yan Shi, referring to Sinopec's deal. "Sinopec Group has been always looking for upstream assets. The move is in line with their strategy."
The acquisition would mark the latest energy sector deal between China and Canada and may be large enough to face review under the Investment Canada Act, which must determine if foreign purchases of domestic firms are of net benefit to Canada.
A year ago the government vetoed BHP Billiton's $38-billion offer for Saskatchewan-based Potash Corp., only the second such veto under the legislation. The move prompted concerns among international investors that Canada was not "open for business."
Still, the energy sector is considered less concentrated than the strategic potash sector and previous foreign takeovers of domestic energy firms have gone ahead. Sinopec already owns a stake in the huge Syncrude Canada oilsands venture.
The transaction is subject to approval by Daylight shareholders and regulatory approval from the Chinese and Canadian governments. Daylight officials said they expect the deal to close before the end of the year.
Daylight's shares have lost about 55 per cent of their value this year, compared with a 25-per-cent decline in Canada's energy sub-index.
Shares in Sinopec Corp., the listed unit of Sinopec group, fell 4.4 per cent in Hong Kong on Monday, mainly due to the Chinese government's 3-per-cent cut on fuel prices from Sunday, underperforming a flat benchmark Hang Seng Index.
Daylight Energy listed in Toronto in 2004 and has core assets in 69 oil and gas fields in northwest Alberta and northeast British Columbia. The company's production for the first half of 2011 averaged 38,000 barrels of oil equivalent per day, Sinopec Group said in the statement.
SIPC is Sinopec Group's wholly-owned subsidiary specifically focusing on overseas upstream oil and gas investments and operations.
Canaccord Genuity Corp is the financial adviser to Daylight, while CIBC World Markets is also advising Daylight's board. Barclays Capital is advising SIPC.