Sinopec to Acquire Canada’s Daylight Energy

By Colin McClelland and Bradley Olson - Oct 10, 2011 1:12 PM GMT+0700

China Petrochemical Corp., the nation’s biggest refiner, agreed to buy Daylight Energy Ltd. (DAY) for C$2.2 billion ($2.1 billion) in its largest acquisition this year, gaining Canadian oil and shale-gas reserves.

The state-owned company known as Sinopec Group offered C$10.08 a share in cash, Calgary, Alberta-based Daylight said yesterday. That’s a 70 percent premium to Daylight’s average price over the past 20 trading days and more than double the average 32 percent premium for comparable cash bids for North American energy explorers, data compiled by Bloomberg show.

The deal would give the Beijing-based company access to more than 300,000 acres of land in areas rich with oil and natural gas, adding to its expansion outside Asia after falling crude prices made valuations attractive. Sinopec Group and Cnooc Ltd. (883) are among Chinese companies that have bought almost $30 billion of Canadian energy assets in the past five years.

“Sinopec made a number of oil-sands acquisitions, and this is probably the most gas they’ve acquired in western Canada,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by telephone today. “It seems that Sinopec is potentially eyeing longer-term development of those for LNG exports to the Asia-Pacific market, building on what Canadian companies are trying to do.”

North America may export 5 billion cubic feet a day of liquefied natural gas by 2017 from projects turning surplus gas from shale into LNG for shipment to Asia and Europe, New York- based consultant Eurasia Group said in a report Aug. 31. Encana Corp., Canada’s biggest gas producer, said Oct. 4 it expects to make a final investment decision on the 1.4 billion cubic feet- a-day Kitimat LNG facility in British Columbia in early 2012.

Daylight’s Assets

Daylight’s proven and probable reserves rose 46 percent to 174 million barrels of oil equivalent at the end of 2010, the company said March 1. Beveridge values Daylight’s reserves at $16.70 per barrel of oil equivalent, saying Sinopec Group is paying a “fair price” for those assets.

Daylight has assets in 69 oil and gas fields in Northwest Alberta and Northeast British Columbia, with production in the first half averaging 38,000 barrels of oil equivalent, according to the statement.

In Alberta, Daylight owns rights to more than 130,000 acres of the Duvernay shale block where the company expects to find oil and liquids rich in gas, it said in an Aug. 3 statement.

Shale in China

Sinopec Group will join rival China National Petroleum Corp. and Cnooc in seeking technology through partnerships as China, estimated to hold more gas trapped in shale than the U.S., opens new areas to exploration. The world’s biggest energy user, which currently doesn’t produce any shale gas commercially, has brought in foreign partners including Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. to assess its shale potential.

China Petroleum & Chemical Corp. (386), Sinopec Group’s Hong Kong-listed unit, fell 4.8 percent to HK$7.13 as of the midday break, after the Chinese government cut fuel prices. The benchmark Hang Seng Index declined 0.5 percent. Daylight closed at C$4.59 on Oct. 7 and averaged C$5.85 over the past 20 trading days.

China Petroleum finished drilling its first shale-gas well in Hubei province July 15, Sinopec Group said July 26. Collaboration with overseas companies will help boost the search for shale-gas resources, and “future growth will mainly come from unconventional gas,” Chairman Fu Chengyu said Aug. 30.

The company will further grow its business in Canada as part of its global expansion, Sinopec Group said in an e-mailed statement today.

Attractive Assets

Daylight said its board has approved the purchase. Sinopec Group is making the purchase through its Sinopec International Petroleum Exploration and Production Corp. unit.

The purchase “recognizes the highly attractive asset portfolio” of the target, Chief Executive Officer Anthony Lambert said in yesterday’s statement.

Daylight’s shares have declined 54 percent in the past year, making the company an ideal takeover target for Sinopec Group, Michael Tims, chairman of investment bank Peters & Co. Ltd. in Calgary, said by telephone. More investment in Canada by international companies such as Cnooc or India’s Reliance Industries Ltd. may be imminent, according to Tims.

“We’ve got a confluence of a lot of adverse events in the global picture which have conspired to bring share prices down,” Tims said. “Those who have a longer time horizon may find this to be a great time.”

Canaccord Genuity Corp. and Canadian Imperial Bank of Commerce’s CIBC World Markets Inc. unit are advising Daylight in the transaction, and Blake, Cassels & Graydon LLP is the company’s legal adviser, Daylight said.

Sinopec Group is being advised by Barclays Plc’s Barclays Capital and Vinson & Elkins LLP and Bennett Jones LLP are its legal advisers.

Asian buyers may spend $150 billion by 2016 to secure energy resources for their faster-growing economies and targets could include Tullow Oil Plc, Canadian Oil Sands Ltd. and Kosmos Energy Ltd., according to Sanford C. Bernstein.

To contact the reporters on this story: Colin McClelland in Toronto at cmcclelland1@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editors responsible for this story: Amit Prakash at aprakash1@bloomberg.net; Susan Warren at susanwarren@bloomberg.net.