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China’s Yanchang makes Canada move despite restrictions

Despite new restrictions on the role of state-owned enterprises in Canada, Chinese oil companies remain keen to gain a foothold in the country’s oil patch

On 3 September, Yanchang Petroleum, which is owned by Shaanxi province and listed on the Hong Kong Stock Exchange (HSE), said it would acquire Calgary-based Novus Energy in a cash deal worth C$232 million ($221m), or C$1.18 per Novus share. Including debt, the transaction is worth C$320m. The transaction price is less than the C$344m threshold that would trigger an automatic review under Canada’s new foreign investment laws.

Most Canadian deals by Asian state-controlled firms have focused on the country’s oil sands or liquefied natural gas projects. Yanchang, however,  is buying Novus’ light, tight oil assets. The company produced just 3,500 barrels a day (b/d) in the second quarter. But it hopes to expand in two of Canada’s largest mature fields, which are being rejuvenated with horizontal drilling and multi-stage hydraulic fracturing (fracking).

After years of decline, Canada’s mature fields have reversed production losses and are now pumping 1m b/d for the first time since the 1970s, or a third of the country’s total oil output, according to the Energy Resources Conservation Board.

The bulk of Novus’ production comes from two prolific plays that have been under continuous development since the 1950s: the tight Cardium formation in Alberta and the Viking sands in southern Saskatchewan. 

Novus offers Yanchang a low-risk entry into a repeatable play, with predictable results and reasonably large upside potential.

It also offers a testing ground for a new tight oil development technology. Companies in the area are testing liquefied petroleum gas (LPG) as a substitute for water in fracking operations. In China, a shortage of water is one of the most significant impediments to the development of its potentially rich shale reserves.

Yanchang has also pledged  to fund Novus’ future growth. The Canadian company launched a strategic review in January last year and has been seeking buyers or financial backers since.

Until recently, China’s state oil companies have preferred to partner with established local players in blockbuster deals – China National Offshore Oil Corporation’s C$15bn takeover of Nexen being the high-water mark.

Novus, by contrast, is a junior. It is listed on the Canadian Venture stock exchange, and has a market capitalisation of less than C$500m.

The transaction barely moves the needle – for Canada or China. In accordance with the HSE’s corporate governance rules, Yanchang only acknowledged the deal by issuing bonds to pay for it. 

But the deal means Yanchang will be able to make further, small acquisitions in Canada, and may, indeed, establish a template for future foreign investment in the country: careful, slow and small-scale.

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