May 13 (Bloomberg) -- China’s sovereign wealth fund agreed to invest C$817 million ($803 million) in a new oil-sands venture with Canada’s Penn West Energy Trust, gaining a stake in the world’s largest crude deposits outside Saudi Arabia.
China Investment Corp. will pay C$312 million up front and C$505 million of Penn West’s future expenses for a 45 percent stake in the venture, the Calgary-based trust said today in a statement. Penn West said it will contribute C$1.8 billion in assets to the venture, which will develop 237,000 acres of oil-sands properties in the Peace River area of northern Alberta.
“It will work well for them,” said Adam Waterous, global head of investment banking at Scotia Capital Inc. in Calgary. “Asian buyers like China, Korea and India will be a major driver for mergers and acquisitions.”
The Chinese fund, known as CIC, said last year that it had $110 billion for overseas investments and that it would focus on commodities companies and property to protect against accelerating inflation. Alberta’s tar-encrusted sands hold 175 billion barrels of recoverable oil, second only to Saudi Arabia’s 264 billion barrels, according to an estimate by the Canadian Association of Petroleum Producers.
CIC also agreed to buy more than 23.5 million Penn West units, representing a 5 percent stake in the trust, for about C$435 million. The price represents a 2 percent discount to market prices for the units over the past five days, Penn West said.
Penn West rose 74 cents, or 3.8 percent, to C$20.19 as of the 4 p.m. close of Toronto Stock Exchange trading. The units had dropped 9.6 percent in the current quarter before today.
Penn West said it’s making the deal to provide the capital needed to realize the potential of its resources. Cash from the venture agreement and equity sale also will help fund development of the trust’s light-oil properties.
The assets Penn West is contributing to the venture currently produce the equivalent of 2,700 barrels of oil a day, according to the statement.
State-run Chinese companies spent a record $32 billion last year acquiring resources overseas after oil demand jumped in the world’s fastest-growing major economy. PetroChina Co. won Canadian government approval in December to buy a stake in two Alberta oil-sands projects for C$1.9 billion.
“Chinese companies are increasingly sophisticated in acquisitions” and have gained more knowledge of Canada’s industry, Waterous said.
The Penn West transaction is scheduled to close about June 1, the trust said. Mackie Research Capital Corp. advised the trust.
Penn West ended the first quarter averaging production equivalent to about 165,000 barrels of oil a day, with crude making up about 60 percent of the total, Chief Operating Officer Murray Nunns told investors on a May 5 conference call. Output averaged more than 177,000 barrels a day last year.
Canadian trusts such as Penn West attracted investors by paying out most of their cash flow to unit holders in tax-advantaged distributions. Such trusts began merging or converting to corporations after the federal government said in October 2006 that it would begin taxing their earnings in 2011.
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