PetroChina Co. walked away from what would have been its biggest overseas acquisition, the C$5.4 billion ($5.5 billion) purchase of natural-gas assets in Canada, after failing to agree on price.
Asia’s largest energy producer and Encana Corp. (ECA) were unable to reach a final accord because of differences over asset valuation, Mao Zefeng, a Beijing-based PetroChina spokesman, said by phone today.
The 50-percent stake purchase in Encana’s Cutbank Ridge assets would have given PetroChina its first shale-gas reserves in North America as it competes with global rivals for energy supplies. The deal’s collapse may indicate Chinese companies are becoming more discerning after paying an average premium of 7.2 percent on $95 billion of energy acquisitions since 2006.
“Unless Encana can come down 20 percent, I don’t think PetroChina would go ahead,” Gordon Kwan, the Hong Kong-based head of regional energy research at Mirae Asset Securities Ltd., said by telephone. “The problem is Encana is not going to come down 20 percent because there are other buyers out there, especially Exxon Mobil, BP, ConocoPhillips are all eager to get into shale gas.”
Gas prices have risen 8.4 percent in New York since Feb. 9, when the deal was announced, increasing the cost of acquisitions. The Cutbank Ridge assets hold the equivalent of about 1 trillion cubic feet of gas, according to Encana. The company had total gas reserves of 13.3 trillion cubic feet as of the end of 2010.
The failed transaction is the second in Canada by a Chinese company since April, when a hostile bid by Minmetals Resources Ltd. for copper producer Equinox Minerals Ltd. was topped by a C$7.32 billion offer from Barrick Gold Corp.
Encana fell 2.3 percent to C$28.78 at the close of Toronto trading yesterday. PetroChina declined 0.4 percent to HK$11.04 in Hong Kong today, while the benchmark Hang Seng Index (HSI) was almost unchanged.
“The stereotype of the Chinese grabbing any deal at any price just isn’t valid,” said Wenran Jiang, a University of Alberta professor and senior fellow at the Asia Pacific Foundation. “The Chinese are tough negotiators and have become more nuanced and scrutinize every deal.”
Encana and PetroChina failed to agree on a joint operating agreement, Alan Boras, an Encana spokesman based in Calgary, said yesterday.
PetroChina’s rejection of the Encana deal shouldn’t be seen as a slackening of Chinese interest in North American shale properties, according to John Stephenson, a senior portfolio manager at First Asset Investment Inc. in Toronto. Shale is a dense rock formation into which drillers inject water, chemicals and sand to release oil or gas.
Chinese Shale Potential
China has acquired overseas shale-gas assets to gain expertise in producing the hard-to-extract resource and brought in foreign partners including Royal Dutch Shell Plc and Chevron Corp. to assess the nation’s shale potential.
The country may have 26 trillion cubic meters of shale gas, more than 10 times its proven holdings of conventional gas, Zhang Dawei, deputy director of oil and gas strategy research at the Ministry of Land and Resources, said in April.
PetroChina’s parent, China National Petroleum Corp., and Shell are currently exploring the Jinqiu shale-gas block in southwestern Sichuan province. Shell and PetroChina are already operating the Changbei tight-gas field in the Ordos Basin in northern Shaanxi province and exploring the Fushun-Yongchuan block in Sichuan.
The Encana deal would have surpassed PetroChina’s C$1.9 billion purchase of two Alberta oil-sands projects a year ago. The failed transaction won’t affect PetroChina’s strategy in North America, spokesman Mao said.
Other Asian companies have entered the Canadian gas market. Encana in 2010 reached a $1.1 billion agreement to sell stakes in three gas fields to Korea Gas Corp. Petroliam Nasional Bhd, Malaysia’s state-owned oil company, said on June 2 it would spend as much as C$1.07 billion for stakes in Progress Energy Resources Corp. (PRQ)’s fields.
Encana, Canada’s largest gas producer, faces the prospect of slower growth unless it finds a partner to help develop millions of cubic feet of shale reserves. The cancellation of the PetroChina deal is “negative for Encana’s credit profile,” wrote Moody’s Investors Service yesterday in a note to clients. Moody’s said the partnership would have helped the company’s liquidity and “ability to fund negative free cash flow.”
Chief Executive Officer Randy Eresman said on April 20 that Encana was looking for more partners to help fund fuel extraction in British Columbia amid “unsustainably low” gas prices. First-quarter revenue fell by more than half from a year earlier and net income dropped to $78 million from $1.49 billion.
Gas futures prices have averaged $4.289 per million British thermal units this year in New York. Prices have declined 52 percent from the 2008 average of $8.899.
Encana said joint venture talks with potential investors are “well under way” for other projects, including the Horn River shale and Greater Sierra field. The company expects to receive $1 billion to $2 billion in revenue from asset sales, up from a previous forecast of $500 million to $1 billion, according to a statement yesterday.