Sunshine to Penn West Hamper China Bet: Corporate Canada

China’s $37 billion bet on Canadian energy producers, from Sunshine Oilsands Ltd. to Penn West Petroleum Ltd., is producing disappointing results amid sinking resource prices and operational breakdowns.

Penn West and Sunshine, partly-owned by China Investment Corp., the Asian country’s sovereign wealth fund, have tumbled 17 percent and 48 percent respectively this year. Syncrude Canada Ltd., whose owners include Cnooc Ltd. and China Petrochemical Corp., cut its production target three times, while declining natural gas prices have triggered a review of Sinopec Daylight Energy Ltd.’s assets.

“The scuttlebutt around the table is that the Chinese were not informed investors,” Sam La Bell, a Toronto-based analyst at Veritas Investment Research, said in a Dec. 17 phone interview. “They had a long-term view that oil was going up and they had a mandate to go buy oil assets. They weren’t necessarily being selective.”

Chinese investments in Canada’s energy sector have cooled this year to less than $1 billion, after a record $19.3 billion in 2012, including Cnooc’s $15.1 billion acquisition of Nexen Inc., according to data compiled by Bloomberg. China has invested about $37 billion in the industry since the beginning of 2008, the data show. The slowdown in acquisitions and lower returns come after Prime Minister Stephen Harper last year imposed limits on oil-sands purchases by state-owned enterprises.

‘Buyer Beware’

Falling fossil fuel prices, delays in building pipelines for exporting oil and the time and money to understand how to operate in the world’s third-largest oil reserves have led to a difficult year for Chinese investors, said Goldy Hyder, president of Hill+Knowlton Strategies Canada which advised Cnooc during its purchase of Nexen.

“There’s angst around Canada these days and more than a bit of ’buyer beware,’” he said in an interview in Calgary. “Next year we may start to see some cracks appearing, especially in the joint ventures over differences of opinion.”

Felix Chee is stepping down as head of CIC’s Toronto office, according to two people familiar with the fund’s plans. Chee, who will leave when his term ends this month, didn’t return calls and e-mails to his Toronto office seeking comment. Calls to the CIC office in Beijing weren’t immediately returned.

Subsidizing Market

CIC opened its first overseas office in Toronto two years ago with a mandate to expand into Canada’s natural resource sector. The fund may expand its North American presence with a U.S. office, while keeping its Toronto location open, said one of the people, who asked not to be named because they aren’t authorized to speak publicly about the plans.

Chinese investors have been “buying all this stuff and not making returns,” Wenran Jiang, a University of Alberta professor and adviser to the Alberta government and industry, said in an interview. “We should be very grateful to the Chinese who virtually put all their money into subsidizing our losing energy market.”

Among CIC’s first major investments in Canada was a $1.5 billion stake in Teck Resources Ltd., in July 2009.

A year after that purchase, CIC and Penn West announced they would jointly develop an oil-sands project in Alberta through a partnership in which CIC agreed to invest C$817 million ($762 million) for a 45 percent stake. That joint venture is now among as much as C$2 billion in assets Penn West plans to sell as Dave Roberts, its chief executive officer since June, seeks a turnaround of the Calgary-based company. CIC bought a 5 percent stake in Penn West as part of the deal.

Internal Competition

“The investment in Penn West was probably a bad idea,” said La Bell, referring to CIC’s stock purchase. Penn West, which underwent a board and management shakeup to address rising costs and high debt, has lost 56 percent since the May 13, 2010 agreement, compared with a 3.8 percent rise among Canadian energy companies on the Standard & Poor’s/TSX Energy Index. Penn West rose 0.8 percent to C$9.05 at 9:52 a.m. in Toronto today.

“Chinese nationally-owned oil companies do not speak with a single voice and are in competition with each other as well as others in the market,” Yuen Pau Woo, president and CEO of the Asia Pacific Foundation of Canada, said in an interview in Calgary. “Their entry into the Canadian market and the competition with each other may have caused them to be rash.”

Tough Industry

CIC’s investment in Vancouver-based SouthGobi Resources Ltd. has also soured. CIC bought 3.05 million shares in the company, which mines coal in Mongolia, for C$17 a piece in January 2010. The shares closed at 86 cents yesterday, for a decline of 95 percent. In addition, the fund bought $500 million worth of convertible bonds at a conversion price of between C$11.88 and C$8.88, SouthGobi said in its prospectus.

Chinese investors are not alone in losing on Canadian energy investments, said Woo.

“They find themselves in the same position as the industry as a whole, in a tough spot with depressed gas prices and discounted prices for oil,” he said.

Natural gas prices on the New York Mercantile Exchange have averaged $3.71 per million British thermal units this year. That compares with $14.51 per Btu that South Korea paid to import liquefied natural gas from Africa and the Middle East in November. Canadian heavy crude has slumped 20 percent from this year’s high on July 18 of $91.54.

‘Unusual Circumstances’

Sunshine Oilsands’ West Ells project has stalled because of financing delays, even with shareholders like CIC, Sinopec and China Life Insurance Co., said John Zahary, former CEO of Sunshine, who resigned earlier this month. Sunshine, the first Canadian oil-sands company to sell shares in an initial public offering on the Hong Kong stock exchange, has slumped 69 percent since its first day of trading on March 1, 2012, slashing the value of CIC’s initial $150 million investment.

“Whenever companies come to Canada, whether it’s from Asia or Europe there are always challenges to understand the way things work here,” said Zahary in an interview in Calgary on Dec. 11.

“There were some unusual circumstances for Sunshine, including getting 80 percent of the project done and then not finishing it and not being able to pay the suppliers,” he said, declining to provide more details about the delays.

Cost increases caused concerns for Sunshine’s major shareholders, said interim CEO David Sealock, in an e-mailed response to questions. Financing for the company’s oil-sands project was delayed because of the “pull back by the debt markets” for such developments, he said. “This condition has continued and is affecting all developing oil sands companies” that are using steam technology, Sealock said.

Sunshine has 1.2 million acres of leases in Alberta and has struggled, along with other small oil-sands developers, even with deep-pocketed shareholders.

Asset Review

“We saw a big spike in investment last year from the Chinese and now they’re figuring out how to do this,” said Greg Stringham, vice president at the Canadian Association of Petroleum Producers, in an interview. “They’re digesting.”

Sinopec’s Daylight unit, which was purchased in 2011 for C$2.9 billion, owns leases in Alberta that include oil sands, natural gas and liquids. The company’s Northern Lights oil-sands project is a “long way off” from being developed and the company is drilling for liquids at its Pembina holdings while gas prices languish, Cam Proctor, a vice president and the chief legal officer at Sinopec Canada, said.

“Softening gas prices have made us review assets,” he said during a Dec. 11 presentation in Calgary.

Lv Dapeng, Sinopec’s Beijing-based spokesman, did not answer two calls to his office seeking comment today. A Cnooc spokeswoman declined to comment.

Long Haul

Sinopec, along with Cnooc, is also an owner of Syncrude, one of Canada’s largest oil-sands mining developments, which has lowered its production forecast three times this year.

All of the Syncrude owners are “dissatisfied with the rate of progress in terms of reliability and asset performance over the last few years,” Steve Williams, CEO of Suncor Energy Inc., a Syncrude partner, said Dec. 4 at an investor presentation, according to a transcript.

While Chinese companies have suffered, time will be the ultimate judge of the projects, said Asia Pacific Foundation’s Woo.

“It’s really a wait and see mode for the Chinese companies that have invested in Canada,” he said.

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