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Robert M Cutler

Robert M Cutler

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Chinese Energy Companies Continue Canadian Acquisitions

Having recently acquired important stakes or out-right ownership of major Canadian energy firms, Chinese companies are now continuing their penetration of Canada's energy sector by targeting the juniors. In particular, the Saskatchewan-based producer Novus Energy announced this week its agreement to be acquired for $320 million by Yanchang Petroleum International Ltd.

Novus is a junior oil and gas company that targets light oil resource plays in Western Canada. Its assets are concentrated in the Viking Formation, a lithological unit in central and eastern Alberta and adjacent west-central Saskatchewan, as well as in southeastern and east-central Saskatchewan. The Viking Formation is well delineated with low-risk reserves including large amounts of "original-oil-in-place". The company plans to employ improved horizontal drilling and multi-stage hydraulic fracturing in order to increase recovery and diminish development costs.

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The deal follows by five months the visit by Canadian Trade Minister Ed Fast to Beijing, where he officially confirmed that Ottawa would welcome further continued investment from Chinese energy companies, even after the US$15.1 billion acquisition of the oil-sands operator Nexen.

Prime Minister Stephen Harper had at the time stated that further foreign state investment in oil sands would be restricted. Novus Energy's assets are concentrated, by contrast, in the Viking Formation, a sandstone unit in central and eastern Alberta and adjacent west-central Saskatchewan, as well as in southeastern and east-central Saskatchewan.

In particular, Novus owns 220 square miles of of drilling leases in the Saskatchewan salient of the Viking Formation, which is reported to be well delineated with low-risk reserves including large amounts of "original-oil-in-place". The company plans to employ improved horizontal drilling and multi-stage hydraulic fracturing in order to increase recovery and diminish development costs.

According to its CEO Ross, Novus has already drilled 200 horizontal wells, none of them dry, producing about 4,000 barrels of oil equivalent per day, of which than 80 per cent of which is light crude oil and with $55 per barrel net-backs.

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Yanchang is a subsidiary of China's fourth-largest oil producer Shannxi Yanchang Petroleum Group, is listed on the Hong Kong exchange.

Last year the revenue of its parent company, the largest in Shaanxi province, amounted to $US 25 billion, concentrated in oil and gas production and petrochemicals, mainly in Shaanxi province but also from African properties (Cameroon, Chad, and Madagascar).

Of the purchase amount, slightly over one-third comprises transaction costs and the assumption of debt. The total price is equivalent to a 40 per cent premium over the company's August 27 closing price. The acquisition still requires shareholder support (two-thirds majority, with voting to take place in late October or early November) as well as court and regulatory and court approvals in both countries.

According to Novus CEO Hugh Ross, the purchase is Yanchang's "their first big international deal," he said, adding that the Chinese company "wanted to get into a real stable, low political risk jurisdiction and they've decided Canada is the place to be." Yanchang plans to use the company as a base for an "aggressive acquisitions" policy as well as expanding drilling operations.

By. Robert M. Cutler of Oilprice.com


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