Sunshine Oilsands Ltd., the first Canadian oil-sands operator to list shares on the Hong Kong exchange, is in “advanced” talks with joint-venture partners to boost production to a potential 1 million barrels a day.
Sunshine, whose shares slumped 47 percent to the lowest close yesterday since its Hong Kong trading debut last February, is in conversations with “more than two and less than 10” investors, Chief Executive Officer John Zahary said in an interview.
The company is betting its ownership structure, which includes several large Chinese investors, along with the Hong Kong listing, will give it access to the capital it needs to develop its 1.2 million acres of leases in Alberta, potentially making it one of the largest oil-sands producers.
“We have the ability to do different things with different people,” Zahary said in a Feb. 26 interview at Sunshine’s Calgary headquarters. “We need capital, they have capital and this creates an opportunity for us.”
Discussions have been with global companies that have expressed interest publicly in getting bigger or entering the oil sands and those that haven’t publicly said anything, Zahary said. The company’s largest Chinese shareholders include China Petrochemical Corp., known as Sinopec, China Investment Corp. and China Life Insurance Overseas Co., according to data compiled by Bloomberg.
“Sunshine is cheap from a valuation perspective,” said John Stephenson, fund manager with First Asset Investment Management Inc. in Toronto, which manages C$2.7 billion ($2.6 billion) in assets. “But there’s a huge risk they don’t develop, they don’t bridge that funding gap for their projects so they have no choice but to go out and look for someone.”
Sunshine would consider cooperating with part-owner Sinopec on some oil-sands projects, including having some Sinopec employees work at the firm’s operations in Alberta, Zahary said.
“If you look around the world, there are still a number of companies that have been somewhat public that they are not here yet and they’d like to be here,” Zahary said.
Sunshine, which raised HK$4.5 billion ($580 million) in a Hong Kong initial public offering last year, now has a market value of HK$7.39 billion. The company also is listed in Toronto where the shares have declined 12 percent since they began trading in November. Sunshine rose 2.7 percent to HK$2.65 in Hong Kong today and climbed 3 percent to 35 Canadian cents at the close in Toronto.
Sunshine’s expansion plans are happening as much larger competitors in the oil sands, including Suncor Energy Inc., Exxon Mobil Corp. and Statoil ASA, are struggling with weak prices for Canadian heavy crude and a lack of pipeline capacity to get their commodity to markets beyond the U.S. For companies that require billions of dollars to buy and develop equipment to extract bitumen, size is everything.
“Oil sands is the realm of the big boys,” Robert Mark, a director and equities analyst at MacDougall, MacDougall & MacTier Inc. in Toronto, which has C$2.5 billion under management, said in an telephone interview. “When it comes to these plays, scale is very important. The starting off point is already a pretty large size.”
Several smaller companies operating in the oil sands are struggling to find partners to fund expansion. Connacher Oil and Gas Ltd., a Calgary-based oil and gas explorer with oil-sands assets and a market value of C$66.1 million, has declined 87 percent in the past year as the company looks for financing for its planned expansion.
Connacher hired the Rothschild Group in August 2011 to search for partners to help boost production to 44,000 barrels a day, up from about 11,500 in the third quarter. So far the company has failed to find a partner.
Connacher Co-Managing Director Kelly Ogle didn’t immediately respond to a voicemail left yesterday at his office.
Athabasca Oil Corp., with a market value of about C$4 billion, has also failed to find a partner for its oil-sands joint venture so far.
In August, Athabasca signed a letter of intent to pursue a joint venture for its Hangingstone and Birch oil-sands properties, it said at the time without naming partners. The company was in talks with Kuwait Petroleum Corp. over a possible C$4 billion joint venture transaction, the Globe and Mail reported on Aug. 31.
“Once we have news to announce we will announce it,” Heather Douglas, an Athabasca spokeswoman, said yesterday in response to a question about whether the company had found a joint venture partner.
Suncor is considering altering a joint venture agreement with Paris-based Total SA over rising costs at its planned Voyageur upgrader. The company will make a decision on the future of the project by the end of March and has already delayed another project with Total to produce bitumen.
Potential Asian buyers of Canadian oil-sands assets have a lot to choose from, said Eric Nuttall, a fund manager with Sprott Asset Management LP in Toronto who manages about C$90 million.
“There is so much product on the market right now in terms of assets for sale and companies looking to do JVs, you really have to be able to distinguish yourself in terms of asset quality,” Nuttall said in an interview. “I would say almost every company in Canada is talking about potentially doing a JV.”
For the moment, Sunshine is producing about 500 barrels a day. The company probably will need to invest about C$15 billion in equipment and operations as it boosts production, Zahary said. That investment and a joint-venture partner would give a boost to the shares, said Andrew Potter, an analyst at CIBC World Markets.
“A JV is key to unlocking value,” Potter wrote in a Dec. 17 note to clients. “The appeal of the Sunshine story rests primarily on whether or not it lands a large JV.”
“Without a JV, the company has large resource that it will struggle for capital to develop in a timely manner,” Potter said.