China Buying its Way to Shale Technology

by Justin Dove

China Buying its Way to Shale Technology

by Justin Dove, Investment U Research

Friday, October 14, 2011

Sinopec's (NYSE: SHI) move to purchase Calgary-based Daylight Energy (OTC: DAYYF.PK) and its 300,000 acres of oil and gas-rich land for $2.2 billion certainly wasn't the first Canadian acquisition by a Chinese oil and gas company - and it won't be the last.

According to Bloomberg, Beijing-based Sinopec and CNOOC Ltd. (NYSE: CEO) are "among Chinese companies that have bought almost $30 billion of Canadian assets in the past five years." This is not only to meet rising energy demands in the world's fastest-growing major economy, but also to gain access to shale drilling methods.

"China has coal bed methane and shale gas resources domestically, so there has been some anticipation in the market that they would want to get some technology partnership in North America so that they could gain an ability to exploit their domestic resources," Barclays' Capital's Michael Zenker told the Vancouver Sun.

China's Interest Shifts to Shale Gas

Most of the early acquisitions centered on access to Canada's vast oil sands reserves, which low estimates tab at 178 billion barrels of oil. Sinopec and CNOOC have also invested heavily in Enbridge Energy's (NYSE: EEP) proposed Northern Gateway pipeline that will connect the Alberta oil sands with the West Coast and ultimately Asia.

However, the most recent acquisitions, such as Daylight Energy, have displayed a shift of interest in shale gas exposure.

According to EIA estimates, China holds 1,275 trillion cubic feet (tcf) of recoverable shale gas. That compares to 862 tcf of recoverable gas in the United States, where shale plays have been all the rage with investors.

Bloomberg reports that China "aims to triple the use of gas to about 10 percent of energy consumption by 2020 to cut its reliance on more polluting coal and oil."

Lofty Goals for China Shale Production

In 2007, China became a net importer of natural gas for the first time in almost two decades.

Then in early 2010, the Ministry of Land Resources announced a goal of producing 530 to 1,000 Bcf/y of shale gas. That proposed production is likely to account for eight to 12 percent of the country's total natural gas by 2020.

Thus far, China has been mostly unwilling to allow foreign companies access to its shale reserves. Currently Royal Dutch Shell is the only company in the region. In June, China National Petroleum agreed to a joint venture with Shell to seek guidance after it took nearly 11 months to set up its first shale well.

Additionally, Bloomberg reported that Chevron Corp. (NYSE: CVX), BP Plc. (NYSE: BP) and Statoil ASA (NYSE: STO) are among international oil and gas companies that have been negotiating to form joint ventures to tap shale- gas assets in China.

But to reach the lofty expectations China has set forth, it will have to speed up its technological advances in shale drilling. The best way to accomplish that will be through acquisitions of companies with the technology and know-how to access its vast shale deposits.

While the country has been hesitant to go after U.S. companies for political reasons, it seems to view Canadian companies as fair game.

China Energy's Possible  Canadian Takeover Targets

Among rumored takeover targets for Chinese energy companies are the following:

  • Birchcliff Energy (OTC: BIREF.PK) - Birchcliff has a market cap of $1.64 billion, but its current P/E of nearly 400 is astronomical. It apparently put itself on the block for sale last week.

  • Celtic Exploration. (OTC: CEXJF.PK) - Celtic is a Calgary-based company holding land all over Alberta. It has a market cap of $2.3 billion. Among Celtic's properties is 94,240 net acres in the Montney shale play and 84,269 net acres in the Duvernay shale play.

  • Talisman Energy (NYSE: TLM) - Talisman would come at a higher price to Chinese companies, with a market cap of $12.58 billion. It also doesn't look like much of a bargain, selling at a 108.58 P/E ratio. The Calgary-based company does have operations spanning the globe, however, including multiple operations in Southeast Asia with close proximity to China.

  • Encana Corp. (NYSE: ECA) - Encana is the largest of the rumored companies with a $14.63 billion market cap, but it's relatively cheap compared to its peers with a P/E of 20.27. It's one of North America's largest natural gas producers and the largest independent natural gas producer in Canada. In June, a proposed joint venture between Encana and PetroChina Ltd. (NYSE: PTR) worth $5.4 billion fell through. The company may currently be attractive as a takeover target considering its relative bargain price.

China definitely has its sights set on increasing its natural gas consumption to cut down high pollution. It also seems determined to increase its own domestic production.

Because of its hesitation to allow foreign companies access to its reserves, it's likely that China will continue its buying spree in Canada.

Considering Sinopec paid a 120-percent premium for Daylight Energy, it may be in investors' best interests to stay tuned to rumors regarding takeovers in the region.

Good investing,

Justin Dove

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