Business, Politics

China’s got gas: Asian giant starts buying north American energy companies

By Richard Poplak 17 October 2011

In what may be the first major natural resources buy for a Chinese parastatal in North America, Sinopec is buying Canadian oil and gas explorer Daylight Energy Ltd. This could herald the arrival of the Chinese in the North American commodities market in a big way. By RICHARD POPLAK.

Markets haven’t been looking good of late, which is probably not news to anyone who regularly reads Daily Maverick. That the second major slowdown in four years is now affecting energy stocks across the globe is also no surprise.  Chinese buyers have been taking advantage of this, and where the US and Canada might once have put barriers to those buyers trying to purchase commodities companies outright, expediency currently makes that impossible.

So welcome, then, Sinopec International Petroleum Exploration and Production Corp (SIPC), a subsidiary of China Petrochemical Corp, or Sinopec. The company agreed to purchase the majority of Daylight Energy, a company fallen on hard times, for $10,08 a share, almost 50% higher than currently valued.

Daylight is mostly a natural gas company, and the Chinese like natural gas. They have been increasingly importing liquefied gas from Canada and the US, so the purchase makes sense. In all, it will tap Sinopec $2.2 billion—something of a bargain if it means the Chinese now have a foothold in the once jealously guarded fortress of North American commodity rights.

But it isn’t cheap because Canadian assets generally aren’t cheap. China, however, has been making big moves to secure enough energy to keep its massive growth moving forward. All this talk of a Chinese slowdown doesn’t suggest a Chinese shutdown, and even 7% growth a year, sucks up a lot of dinosaur juice.

Sinopec has been active in North America before, but never at this level—politics wouldn’t allow it. The Investment Canada Act will probably be called in to review the purchase, but unlike BHP Billiton’s massive $39 billion bid for Potash Corp, it’s unlikely to put up many barriers for a minor player in the vast local natural gas market.

For its part, Daylight Energy listed in Toronto in 2004 and has 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 a day, but its stock has tumbled 55% this year, which is far higher than the spread across competing energy stocks. Sinopec has also taken a bit of a ding lately, what with the Chinese government cutting fuel prices 3%.

That said, Sinopec is a Chinese parastatal functioning at the behest of the government. Clearly it has been charged with going forth and securing energy resources. On the surface, the deal looks win-win, although it still awaits approval from Daylight’s shareholders. They could presumably baulk, betting on gas prices rising in the next couple of years or so, raising share prices considerably higher than Sinopec’s 50%—but by then Daylight may well have seen nightfall. In short, the company doesn’t have much of a choice.

But the American and Canadian governments do have a choice and the question is whether deals like this make sense. The short answer is, of course they do. China needs resources, and North America, to keep the dream alive, depends on Chinese growth to keep the lights on. There is no meaningful strategic interest in denying the Chinese the spoils.

There are, however, risks, and they’re reasonably obvious. It comes down to balance, and in this, both Canada and the US need to make sensible policy decisions. How much energy stock is too much energy stock? There’s no real answer to that question, but for Canada, clearly the potash deal was a step too far.

Nope—the Daylight buy will go ahead. The Chinese have dropped $2.2 billion, and they’ll be dropping a lot more. The new world order marches on, unbidden. DM



Read more:

  • “Sinopec to buy Daylight Energy Ltd for $2.2 billion” in the Globe and Mail.

Photo: REUTERS

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