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China’s Yantai Xinchao extends shale reach in $1.3bn Texas oilfield deal

Producers Tall City Exploration and Plymouth Petroleum sell oilfields in Permian basin for around $1.3bn to Chinese firm aiming to make mark in US shale market

Yantai Xinchao said it will acquire acreage in Borden and Howard counties in west Texas. It is one of the oldest oil producing regions in the US and an area that has seen a revival with shale drilling in the Spraberry play during recent years.

No reserves or production data have been released as yet, but the US Treasury’s Committee on Foreign Investment has approved the deal, the Chinese firm announced in late October.

Deal maker

It is the second major oil deal in Texas for Yantai Xinchao after it bought Juno Energy’s business earlier this year. That deal saw Yantai acquire mature fields in the Permian Basin that held around 25 million barrels in reserves. BMO Capital had estimated the value of those reserves at around $810m in late 2014. The deals are part of a curious restructuring at the Shandong-based Chinese firm. It is dramatically scaling back its property business and pivoting to the oil and gas business, where it has very little experience.

Beijing’s policymakers are widely expected to start breaking the state-owned enterprises’ tight grip over China’s upstream and encourage more private investment in the exploration and production of Chinese oil- and gasfields in the coming years.

The government is also allowing more private companies to import and refine crude. Many mining and other industrial companies are keen to get a foothold in the lucrative oil business.

At the same time, the oil price crash has created opportunities to snap up US oil assets at depressed prices.

A curious model

With private Chinese firms eyeing entry into the domestic oil market, the Yantai Xinchao model of acquiring experience and expertise in the US could be attractive for others. It could even spark a new wave of Chinese investment into the US shale patch, similar to the string of deals Chinese companies made with cash-starved US shale gas companies after natural gas prices collapsed in 2011.

For the US producers, Chinese cash will be welcomed. Small producers have seen their cash flow fall sharply and their access to capital markets and bank lending start to dry up as the oil downturn shows few signs of ending.

Many are starting to see their ability to continue drilling under a lot of pressure. Tall City Exploration, for example, which is backed by ArcLight Capital, drilled just two wells in 2015, compared with 29 wells in 2014, according to data from the Texas Railroad Commission.

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