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China resumes Canadian shopping Drawn by stable, low-risk environment, Yanchang Petroleum bids for Novus, with sights on ‘aggressive’ drilling, further expansion Gary Park For Petroleum News
Tight oil plays in Saskatchewan and Alberta have enticed a revival of Chinese interest in Canadian assets, with a unit of China’s fourth largest producer making a C$320 million bid for Calgary-based Novus Energy.
If completed, the deal will see the Canadian debut of Yanchang Petroleum International, whose controlling shareholder is Shaanxi Yanchang Petroleum, which reportedly has plans for an “aggressive” drilling program and acquisition plan.
Novus, which is currently producing 4,050 barrels of oil equivalent per day (3,452 boe per day in the second quarter, up 20 percent year-over-year), 80 percent of it light crude. It is heavily concentrated in the Viking tight oil play in the Viking Dodsland reservoir of west-central Saskatchewan plus a stake in the Cardium resource play of northwestern Alberta.
It has 140,000 net acres of drilling leases in the Viking play, which accounts for about 90 percent of its production.
Lukewarm response from juniors But the looming entry into the Viking formation by an acquisitive-minded state-owned Chinese corporation is drawing a lukewarm response from junior Viking players, with Neil Roszell, chief executive officer of Raging River Exploration, predicting that within two years “one or two” large companies will lock up the majority of the play.
David Tuer, chief executive officer of privately owned Teine Energy, which holds up to 2,500 drilling locations, said that “any time you introduce a new competitor you have to be aware of the fact that somebody else is at the table.”
He said there is now added pressure on companies to act quickly to seize buying opportunities.
No blocking But so far there is no evidence of anything blocking the path for Yanchang. The dollar value of the deal is C$10 million short of the threshold that triggers an automatic review by Canada’s foreign investment regulators and does not clash with the federal government’s prohibition on foreign state-controlled companies acquiring oil sands producers.
Novus Chief Executive Officer High Ross said “we don’t foresee any issues” with the government intervening in the deal.
Merger and acquisition activity has slowed to a crawl in Canada this year, plunging 77 percent in dollar value during the first half to C$4.4 billion from C$19.3 billion over the same period of 2012 and trailing far behind the peak of C$31.1 billion in 2009.
The number of transactions fell to 45 from 71 during the same period of 2012, with only one of 45 large deals valued at over C$1 billion.
Ross said in a statement Sept. 4 that Yanchang wanted to get into a “stable, low political risk jurisdiction” and, to that end, has chosen Canada.
40% premium Novus said the Yanchang offer — which includes the assumption of C$100 million in net debt — represents a 40 percent premium over its closing price on Aug. 27, the last trading day before the offer, and a 44 percent premium over the one-month volume weighted average trading price.
Novus announced 10 months ago it had hired Cormack Securities and FirstEnergy Capital as advisers to explore strategic options, including a sale.
Ross said Yanchang first approached Novus several months after the review was started.
Closure, scheduled for later this year, depends on approval of two-thirds of Novus shareholders and ratification by Beijing’s State-owned Assets Supervision and Administration Commission, along with other Chinese government approvals.
Shaanxi Yanchang Petroleum, Yanchang’s largest shareholder, will finalize financing arrangements through a convertible bond issue of about C$217 million, Novus said.
During the second quarter Novus drilled eight net horizontal wells in the Dodsland area, raising its first half total to 25 wells.
It estimated second and third quarter on-stream costs will be less than C$875,000 per well.
Analyst: Valuation low? Juan Jarrah, an analyst with TD Securities, said the transaction appears to value assets at lower prices than other recent Viking sales.
“The transaction implies C$79,000 boe per day on current production and C$14 per boe on 2012 (proved plus probable) reserves, about a 35 percent discount on the average of the last seven transactions in the Dodsland Viking over the last 1.5 years,” he said in a note.
Jarrah said the heart of the play in the greater Dodsland area remains fragmented.
FirstEnergy has noted that the Viking play has lived in the shadow of other popular light oil trends such as the Cardium, Montney, Bakken and Beaverhill Lake plays because of its more modest initial production rates, even though it has about 21 operators, led by Husky Energy, Penn West Petroleum and Crescent Point Energy.
That will change radically if Yanchang joins the fold, with C$25 billion in annual revenue to out-compete its peers for access to capital, although Raging River Exploration’s Roszell suggested the Chinese company may also be slowed down by the need to gain approvals from its parent company and will also face language barriers.
FirstEnergy said the results “appear to be more predictable than most others ... and the resource footprint is already solidly delineated.”
The firm said Viking also offers cost advantages of “relatively” cheap drilling in shallow depths compared with other geological formations where horizontal wells with multi-stage fractures are needed to suck up the oil, opening the door for companies large and small.
Roszell: Costs recovered quickly Roszell said the average Viking well drilled this year will recover all costs and start delivering profits in less than a year.
Raging River recently raised its capital budget to C$145 million from C$20 million and expects to drill 140 wells, with average production for 2013 targeted at 5,150 boe per day and the exit rate at 6,300 boe per day (95 percent oil).
Calgary-based investment dealer Peters & Co. rated the Viking as the most popular non-oil sands reservoir in Canada this year, with producers taking out permits for 877 wells and increasing drilling this year by about 57 percent from 2012.
Andrew McCreath, chief executive officer at Forge First Asset Management, said there is a “lot of appetite for Viking assets generally and especially in Saskatchewan. It’s light oil and the netbacks tend to be pretty darn high.”
FirstEnergy said those best positioned to capture shareholder value from the Viking formation are Crescent Point Energy, Whitecap Resources and Raging River.
The analysts said that in addition to Novus, potential acquisitors could be interested in Renegade Petroleum, WestFire Energy and Charger Energy.
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