Daylight deal a win for Chinese

CALGARY — Through its planned $2.2-billion takeover of Daylight Energy Ltd., China’s Sinopec could parlay bargain-basement natural gas prices into much more lucrative undertakings, including liquefied natural gas exports or oilsands development, industry observers said Tuesday.

CALGARY — Through its planned $2.2-billion takeover of Daylight Energy Ltd., China’s Sinopec could parlay bargain-basement natural gas prices into much more lucrative undertakings, including liquefied natural gas exports or oilsands development, industry observers said Tuesday.

“Natural gas, of course, is on sale. It’s like a Wal-Mart special right now,” said Bill Gwozd, vice-president of gas services at Ziff Energy.

Calgary-based Daylight (TSX:DAY) has a mix of oil and natural gas assets in Western Canada, including nearly 65,000 net hectares in the gas-rich Deep Basin area of northwestern Alberta and northeastern British Columbia.

With North American natural gas prices in an anemic range below US$4 per 1,000 cubic feet, Canadian companies in that region have been looking at ways to fetch a better price for the gas they produce.

If Sinopec were to get in on the B.C. liquefied natural gas game, it would essentially be turning US$4 gas into US$10 or US$11 gas.

“It’s a definite win for the Chinese buyers,” said Gwozd.

Daylight has significant holdings in the Montney shale formation, the same neighbourhood natural gas giant Encana Corp. (TSX:ECA) had hoped to form a $5.4-billion joint-venture deal with another Chinese state-owned outfit, PetroChina. That deal ultimately fell through in June when the two companies failed to see eye-to-eye on how the asset would operate.

While it hunts for other link-up opportunities, Encana and two U.S. partners are also planning to build an LNG export terminal on the northern West Coast, at Kitimat, B.C.

Sinopec was likely drawn to Daylight because a pipeline to Kitimat runs close to its Montney lands, said AltaCorp Capital analyst Jeremy McCrea

“When that finally gets built, these guys are in a prime spot to be able to ship their gas to Kitimat,” he said.

Sinopec is also a player in the oilsands, through a nine per cent stake in the Syncrude mine — the largest project of its kind on earth — as well as a 50 per cent stake in the Northern Lights project alongside France’s Total SA.

Oilsands projects are voracious consumers of natural gas, so that’s another way to use that commodity to capitalize on much more robust oil prices, Gwozd said.

Paul Beamish, a business professor at the University of Western Ontario, said it’s not at all surprising that China would continue to invest billions of dollars in Canada’s resource sector, given its rapidly growing economy.

“The reality is that while China is doing lots of its own exploration for natural gas within China, at the end of the day their need for natural gas and oil-based resources is going to continue to grow at a very rapid rate,” he said in an interview from London, Ont.

“Because there’s 43 people for every one in Canada, they have stark need for this. That they’d be interested in natural gas is not a big surprise.”

China also sits on enormous foreign currency reserves that it wants to put to work, snapping up assets globally that will help fuel its growth for years to come.

In the first trading day since Sinopec and Daylight announced the friendly deal, the Toronto Stock Exchange’s capped energy index was up about 3.6 per cent. Canadian markets were closed for the Thanksgiving holiday on Monday.

Daylight shares more than doubled from Friday’s close. They gainted $5.05 to close at $9.64 in afternoon trading on the TSX Tuesday. Sinopec’s bid is worth $10.08 per share.

In a research note, Desjardins Securities analyst Allan Stepa said the deal is a good one for Daylight shareholders.

“Although the cash bid of $10.08 per share is below our previous target price of $13.50 per share, we believe it is quite attractive, given the current macroeconomic environment and debt concerns that have weighed upon the stock in recent weeks.”

China’s buying spree in Canada is far from over, said AltaCorp’s McCrea, but he doesn’t expect heavyweights like Encana or Talisman Energy Inc. (TSX:TLM) to be in the crosshairs.

“They’re going to do more, but smaller deals,” McCrea said.

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