Sinopec's (NYSE: SHI ) $2.1 billion buyout of Daylight Energy has shown how energy players can take advantage of the drop in energy stocks. The deal is also a sign of China strengthening its presence in the North American oil and gas industry. So, will Sinopec stand to gain from the deal?
Daylight has lot of advantages that drew Sinopec toward it. The Canadian oil and gas company has nearly 65,000 net hectares in the gas-rich deep basin area of northwestern Alberta and northeastern British Columbia. Along with this, the company also has significant holdings in the Montney shale formation, which has a pipeline run close to Kitimat in Canada. Alberta-based natural gas producer Encana (NYSE: ECA ) , along with two U.S. partners, has plans to build an LNG export terminal at Kitimat to export LNG to Asia. Given the market potential LNG carries, Daylight is well positioned to deliver value to Sinopec in the coming LNG era.
With natural gas prices in North America below $4 per thousand cubic feet (mcf), margins run low for companies operating in this continent. To fetch higher margins, companies have been on the lookout for other international markets. This is where Sinopec may have a distinct advantage and could be at the start of something big. If the company can liquefy natural gas and ship it to Asia, it can fetch $10 to $11 per mcf, more than double the price in the American market.
Sinopec already has significant investments in Canada's oilsands. The company has a 9% stake in the Syncrude mine and a 50% stake in the Northern Lights project alongside France's Total (NYSE: TOT ) . Oilsands projects require a huge amount of natural gas, giving Sinopec an excellent opportunity to use its natural gas in its own oilsands projects and reduce cost.
In sync with China's energy growth strategy
Companies such as PetroChina (NYSE: PTR ) and CNOOC (NYSE: CEO ) have already entered the Canadian market with significant investments. PetroChina already has a $1.7 billion investment with a 60% stake in the Athabasca Oil Sands Project. Again, China's largest offshore oil and gas producer CNOOC bought the bankrupt Opti Canada for $2.1 billion and, in the process, got a 35% stake in the Long Lake oilsands project in Alberta, Canada.
If Sinopec has the Asian market as its focus, these Canadian investments could create an array of opportunities.
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