Chinese companies increase stake in global upstream energy assets

The 30-day period from mid-July to mid-August was a slow one for US and global energy M&A transactions. We are only reporting five domestic deals and seven international transactions during this time.

China Investment Corp. (CIC) and Gaz de France Suez have entered into a major cooperation framework, which will help GDF Suez in its planned expansion into Asia, where the French company sees a huge growth market. The August 8 deal, which still has to be approved by GDF's board of directors, would allow China's sovereign wealth fund to take a minority stake in the energy giant's exploration and production business, as part of a wider alliance to boost the company's exposure to the energy-hungry Asian market.

Under the deal's terms, CIC will take a 30% stake in the upstream division of GDF for $3.3 billion and a 10% stake in the Atlantic LNG project in the Caribbean nation of Trinidad & Tobago for $850 million. This represents the largest deal by a Chinese state-controlled company since PetroChina's failed attempt to take a 50% interest in Encana's Cutbank Ridge shale assets in Canada in February.

At $12 per proved and probable boe of reserves, the deal didn't include the usual premium that Chinese companies are willing to pay to secure global reserves. The annual EBITDA multiple of less than 5.5 also pointed more towards a deal that seeks long-term cooperation rather than a Chinese asset grab.

The French company has been looking to reduce its debt, while focusing on organic growth and boosting its presence in the Asia-Pacific region.

In another move by Asian companies into the North American energy sector, China's state-owned CNOOC has agreed to acquire OPTI Canada, a bankrupt Calgary-based oil sands producer, for $2.1 billion, including debt. The Canadian company's main asset is a 35% stake in the Long Lake oil sands project in Alberta, which has been plagued by technical problems and is performing below expectations.

The move by CNOOC brings the total expenditure on upstream properties in Canada by Asian companies in the past three years to $16 billion, a figure that would have been even greater had PetroChina's $5.5 billion Montney shale farm-in with Encana not been cancelled last month. The deal will also see CNOOC join fellow Chinese state companies, PetroChina, Sinopec, and CIC in owning interests in the growing Canadian oil sands sector. CNOOC has also signed two multi-billion-dollar shale oil deals with Oklahoma City-based Chesapeake Energy in the past year.

The latest deal has yet to receive regulatory approval from Canadian authorities, but sources in Canada do not believe this will be a major hurdle. Canada has been more open to Chinese investment than has the US, where there are significant political risks to such deals.

The largest US transaction during this period was BreitBurn Energy Partners' proposed $285 million acquisition of certain oil and gas assets of Cabot Oil & Gas Corp. in the Evanston and Green River basins of Wyoming and certain acreage and non-operated oil and gas interests in Colorado and Utah. The deal was announced on July 27, has an effective date of Sept. 1, and is expected to close in early October.

Houston-based Cabot said it plans to use the proceeds from the sale to increase its acreage position in liquids-rich areas of Texas and Oklahoma, as well as enhance its opportunity to drill additional wells in its Marcellus Shale holdings in Pennsylvania.

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