Asian SWFs ramp up in North American oil and gas

Although competing bidders were not named, the stake sale by US oil company Conoco-Phillips was very hotly contested, with suitors reportedly from Korea, Japan and the Middle East, among others, in the mix. Apparently it is not only China that has prioritized securing solid positions in oil and gas producers.

Sovereign wealth funds, from Asia and elsewhere, are key participants in this trend, as evidenced by several recent deals, including China Investment Corporation (CIC)’s JV with Canada’s Penn West Energy Trust; and the move by Singapore’s Temasek Holdings, CIC, and the Korea Investment Corporation (KIC) into US natural gas major Chesapeake Holdings.

Canadian assets realized

Canada remains a key focal point, as evidenced in mid-May, when Penn West announced that it had formed a JV with a wholly-owned CIC unit, with a view to developing the trust’s oil sands (bitumen) assets in the Peace River country of northern Alberta.

Such assets have been the thin edge of the growing investment wedge in the country. With oil prices rising to what seems to be a more or less solid post-crisis range of $85-90 per barrel, and expected to rise even more, the high costs of heavy oil extraction no longer amount to a limit on profitability. And Canadian reserves of this commodity make it an attractive politically and financially stable supplier, second only to Saudi Arabia.

In this specific transaction, Penn West will contribute assets valued at $1.8 billion, while retaining a 55% interest in the partnership. CIC will inject C$817 million ($801 million) in cash for the remaining 45%. Concurrently, CIC will also take about 5% of the trust’s issued and outstanding units for C$435 million ($406.5 million).

Penn West spokesperson Jason Fleury noted that the arrangement will speed development of assets that up until now remained dormant due to a lack of capital. Another analyst added that the investment will also enable Penn West to remain focused on their light oil plays. CIC’s commitment was garnered with zero risk or capital outlay for Penn West.

A private equity perspective

Canadian oil insiders are not surprised by these developments, and only expect to see more of them in future. One reason is a perception shift among Chinese entities that the investment climate is now positively welcoming.

One seasoned international private equity player, who asked to remain unnamed, told AVCJ, “Actually, I’d thought it would happen faster, and on a bigger scale. The Chinese are locking up the resources they know they’ll need to fuel their growth going forward, [as this] is a fundamental priority. We’re seeing government-owned entities, and even individuals with money, particularly from Hong Kong, who realize that they want to be into resources in the Western world, and in emerging markets as well.”

China’s current Canadian oil deals are part of a much broader phenomenon, seen in Latin America and Africa as well.

The capital shift

But there’s another reason Asian investors have become so prominent in the Canadian oil fields of late, AVCJ’s private equity source notes:

“I think if we had the capital here, it might not be happening,” he says. “But the US and other usual capital providers just aren’t putting it up anymore. I’m on the phone to Asian investors all the time, because they are the ones who are flush with cash."

AVCJ’s source is a distressed assets buyer, who targets gas and oil companies that are in trouble. And there are a lot of them these days at the mid-market level. The end game for investors in this space, he says, is to either list part of the target in an IPO, or sell the asset to a bigger company.

Cash flow woes

“People are having a very rough time raising money for deals,” he continued. “I’m getting deals done, which is indicative of the straits some are in, especially among juniors, and especially with the [natural] gas price where it is. They’re having cash flow issues, and private investors aren’t stepping up. The reason for that, of course, is that a lot of private investors are actually funds, and the funds themselves are having trouble raising money. So people like me, who are dealing with this in North America, are following the money offshore.”

University of Alberta professor Wenran Jiang, the MacTaggart Research Chair of the China Institute and a long-time observer of these developments, agrees and adds yet another driver.

“When the market was booming before, the producers had no issues,” Jiang explains. “They could simply pour the product southward, so to speak, and do whatever they wanted. But now US market demand is down, and there’s another issue – namely, pressure from the Obama administration to label Canadian tar sands product ‘dirty oil’. And that’s made a lot of producers nervous, thinking that maybe it’s time that we looked beyond the US.”

US gas

Chesapeake Energy, the second largest natural gas producer in the US – and the leader in gas production from shale rock – has lately relieved its heavy debt burden by successfully seeking investment further afield. It moved first in Europe, courtesy of strategic peers BP, Total and Statoil, to whom it has sold a collective $10.8 billion in gas holdings, and then opened discussions with Asia.

Chesapeake recently announced that CIC and KIC are joining a $900 million investment. This comes on the back of an original joint buy-in by Singaporean SWF Temasek Holdings, for $600 million of convertible preferred stock, and Beijing-based multi-strategy regional firm Hopu Investment Management, for an additional $100 million.

CIC and KIC are assumed to have committed to about $300 million each of the new issue, with the latter claiming that Chesapeake made the initial approach.
NYSE-listed Chesapeake’s senior outstanding debt is pegged at about $10.4 billion, which is why the company has announced plans to raise $5 billion over the next two years. Industry observers believe this will pose no serious problem.

The company’s attraction to offshore investors owes much to its leading role in the US natural gas segment, with its very active drilling program accounting for one in seven US wells. And it retains 67-80% stakes in the four biggest shale/gas fields in the US. Production, meanwhile, is growing by 6-8% this year with projections that this will increase to 14-16% in 2011.

Further attractions

Additionally, the tie-up with Hopu, given that firm’s advisory capabilities, could well presage a future JV between Chesapeake and a Chinese oil giant like CNOOC, PetroChina or Sinopec. This could be driven by China’s goal to produce 25% of its own natural gas from domestic shale deposits, principally in Sichuan province. With this in mind, Chesapeake’s proven expertise would have real value. And with natural gas prices presently in a slump, and clean/green imperatives likely to drive greater use of gas as a clean energy source relative to coal, there are multiple profitability drivers in prospect.

Other recent Chinese oil investments worldwide typify the same strategic objectives as the CIC deals. PetroChina, in tandem with the China Development Bank, recently inked an accord to extend a $20 billion oil-for-credit loan with Venezuela on a 60/40 basis, with potential further provisions regarding refining in China. Furthermore, Sinochem Corp. another leading PRC state-owned enterprise, will acquire a 40% interest in a new oil field in Brazil for $3 billion cash.

This reflects observations from AVCJ sources that China, via SWFs and SOEs alike, is executing a well-thought-out and evolving strategic plan to extend its oil companies’ reach and capabilities, upstream and downstream. And, they add, various Chinese interests are surprisingly transparent about their plans.

Expectations can only be that the large cash reserves held by Chinese, India, Korean, Singaporean and other SWFs will translate into an ongoing flow of funds to the biggest and best international oil prospects. 

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• Topics
• North America
• Funds
• LPs
• Industrials
• Temasek Holdings
• CIC
• Hopu Investment Management
• KIC