China buying while we talk

Claudia Cattaneo, Financial Post · Oct. 12, 2011 | Last Updated: Oct. 12, 2011 3:08 AM ET

While we sort out where we stand, Chinese money keeps buying up Canadian oil and gas reserves.

Sinopec's $2.2-billion acquisition this week of shale-gas producer Daylight Energy Ltd. is sure to be followed by more. Athabasca Oil Sands Corp.'s two major oil-sands projects are in play because of put/call options with PetroChina that could increase the Chinese company's ownership to 100% from 60%. Birchcliff Energy Ltd., another unconventional gas producer, put itself on the block last week following unsolicited expressions of interest. Market speculation is bubbling about which company the Chinese will snap up next - from senior Talisman Energy Inc. to junior Celtic Exploration Ltd.

"In our view, [the Daylight Energy deal] is more than a simple one-time acquisition," Stéfane Marion, chief economist and strategist at National Bank Financial Group, said in a note Tuesday. "It reflects the acceleration of a macro trend. If China is serious about letting its currency float in the next five years, there is no need for its government (and state-owned enterprises) to own more than $3-trillion in foreign reserves. It makes more sense for China to start recycling its paper holdings into tangible assets."

With oil and gas shares depressed by the global sell-off, investment research firm Sanford C. Bernstein & Co. predicted in a report that Asian oil and gas companies will spend $150-billion in the next five years on global assets, including Canadian oil sands. Future deals would be "bigger and bolder," it said.

The Chinese invasion, sweetened by big premiums, is hard not to like at a time of great market weakness, ideological confusion about fossil fuels and Canada/U.S. political brinkmanship over the Keystone XL oil-sands pipeline.

The federal government has been supportive, approving all acquisitions so far. As for the market, it can't wait for the next big cheque.

Still, some questions need to be asked:

? Is Canada naïve to open its doors to Chinese investment in the name of free trade? Free-market supporters say Canada is a trading nation and should welcome all foreign investment, regardless of where it comes from.
A: It's not so simple. China's buying is being done by statecontrolled companies that answer to a Communist regime, not the market.
? Will the investment lead to the opening of a new market in Asia - or make us dependent on two economic powerhouses instead of one?
A: Supporters of Chinese deals say the cash allows Canada to capture capital to develop resources, lead to new customers for its energy outside the United States, and promise higher energy prices.
The wrinkle is that the more Canadian resources are controlled by China, the less say Canadians will have over how they are developed, where they are sold and for how much, putting China in the driver's seat, much like the United States is now.
? Chinese investment wouldn't be as welcome if the United States, Canada's natural and historic market for oil and gas, weren't so conflicted about whether to support fossil fuels from Canada, as shown by the raging debate over Keystone XL, or encourage renewable energy alternatives.
A: Hasn't Chinese investment turned this into a false choice, since Canada's fossil fuels will keep growing, just not to supply Americans?
? Will Chinese investment mean faster development - or slower? Deals involving Asian companies are motivated by receiving capital that is not available today in North America to more quickly develop Canada's oil and gas resources. Yet the track record of Asian companies suggests otherwise. They have huge hierarchies, are risk-averse and are slow decision makers.
A: "Our greatest strengths in Western Canada resource development are a keen and hungry workforce, an abundance of data, a short-term turnover of leases, and a high recycle of producing oil and gas properties, leading to the most efficient resource development in the world," one senior oil executive put it. "Historically, multinational energy company capital, with its latest source being Chinese, will tend to be a drag on our pace of development as investment decisions are very slow and asset rationalization is frowned on, reducing the effectiveness of our high-paced junior and intermediate oil and gas sector."

Why aren't green groups all over this? They're running around Washington and the European Union, leveraging democracy to knock Canada's oil sands and shale gas, while being silent about the change in ownership that is slowly taking place. Are they worried that influencing Chinese oil companies to improve environmental and safety standards will be about as likely - or welcome - as staging protests in Tiananmen Square?

http://business.financialpost.com/2011/10/11/china-buying-while-we-talk/

Sinopec to buy Canada’s Daylight Energy for $2.2-billion

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NEW YORK/BEIJING— Reuters
By: Lewis Krauskopf and Wan Xu
Published Monday, Oct. 10, 2011 11:14AM EDT
A unit of China Petrochemical Corp. (Sinopec) has signed a deal to buy Canadian oil and gas explorer Daylight Energy Ltd. (DAY-T9.75----%) for $2.2-billion in cash, underscoring China’s quest to secure enough energy to power its booming economy.

Chinese buyers have been taking advantage of depressed stock prices and a difficult fundraising environment to make deals. A combination of falling oil prices and debt levels has hit Canadian oil and gas shares in recent months as investors fret that growth prospects are shrivelling.

Sinopec International Petroleum Exploration and Production Corp (SIPC) agreed to buy Calgary-based Daylight for $10.08 per share. That is more than double the closing price of $4.59 per share on Friday, but Daylight said it is only a 43.6-per-cent premium over the 60-day weighted average trading price.

A key reason for the deal is that Daylight is predominately a natural gas company and China would like to export liquefied natural gas from western Canada, said Neil Beveridge, a research analyst at Sanford C. Bernstein & Co in Hong Kong.

Sinopec Group “will further expand its portfolio in Canada as it advances its international businesses,” the company said in a statement on Monday.

With Beijing’s blessing, China’s big state-owned firms have aggressively moved to buy overseas assets. State energy firms in particular have the responsibility to secure enough natural resources to satisfy growing demand in the world’s biggest energy consumer.

China’s outbound deals in energy and mining so far this year total $26-billion, compared with $32.3-billion in the same period last year, according to Thomson Reuters data.

In July, China’s top offshore oil producer, CNOOC Ltd., agreed to buy struggling Opti Canada Inc. for $34-million and $2-billion in debt and late last month, China’s Minmetals Resources Ltd. agreed to buy Africa-focused copper miner Anvil Mining for $1.28-billion.

“It is quite expensive, but Canadian assets are mostly expensive, compared with assets in other regions,” said UOB Kay Hian analyst Yan Shi, referring to Sinopec’s deal. “Sinopec Group has been always looking for upstream assets. The move is in line with their strategy.”

The acquisition would mark the latest energy sector deal between China and Canada and may be large enough to face review under the Investment Canada Act, which must determine if foreign purchases of domestic firms are of net benefit to Canada.

A year ago the government vetoed BHP Billiton’s $38-billion offer for Saskatchewan-based Potash Corp., only the second such veto under the legislation. The move prompted concerns among international investors that Canada was not “open for business.”

Still, the energy sector is considered less concentrated than the strategic potash sector and previous foreign takeovers of domestic energy firms have gone ahead. Sinopec already owns a stake in the huge Syncrude Canada oilsands venture.

The transaction is subject to approval by Daylight shareholders and regulatory approval from the Chinese and Canadian governments. Daylight officials said they expect the deal to close before the end of the year.

Daylight’s shares have lost about 55 per cent of their value this year, compared with a 25-per-cent decline in Canada’s energy sub-index   
..........................................................................................................................................................................

http://www.theglobeandmail.com/report-on-business/sinopec-to-buy-canadas-daylight-energy-for-22-billion/article2196507/

Sinopec bids $2.2-billion for Alberta energy company

By: Nathan Vanderklippe
CALGARY— Globe and Mail Update

Published Sunday, Oct. 09, 2011 1:59PM EDT-
Chinese energy giant Sinopec International Petroleum Exploration is testing the waters on a bold new energy strategy in Canada, as it moves to buy out an Alberta oil and gas company for $2.2-billion in cash.

Sinopec’s bid for Daylight Energy Ltd., whose large portfolio of Alberta and British Columbia land contains potentially significant quantities of natural gas, comes amid a new push by Asian firms to lock up Canadian energy that could soon be loaded onto tankers and shipped across the Pacific.

But the Daylight deal marks a departure from previous Chinese acquisitions, which have been carried out with a deliberately soft touch, fashioned to avoid a nationalistic backlash by buying only small portions of other companies, or scooping up troubled firms.

Now, however, Sinopec is cementing a new trend that has seen Asian entities seek greater control in their North American investments. In buying Daylight, Sinopec is assuming a newly confident stance in Canada, where it has operated since 2005.

“This is breaking new ground,” said Wenran Jiang, an expert on Asian energy investments in Canada who holds a research chair at the University of Alberta's China Institute.

Sinopec must still win over Daylight shareholders, who will receive $10.08 a share, more than double Daylight’s $4.59 Friday closing price. The company also needs to secure the approval of Canadian federal authorities. Under the Investment Canada Act, all direct foreign acquisitions over a set amount – the threshold was $299-million in 2010 – trigger a review by the Minister of Industry, who has 45 days to determine whether or not to allow the investment.

If it succeeds, Sinopec will have opened an important door to expanding Chinese activity in a country whose resources and stability are increasingly coveted by foreign powers.

“The message here for the Canadian oil industry is that China has a good appetite, China is willing to invest in a wide range of our energy sectors,” Mr. Jiang said.

The Daylight deal is not the first outright takeover of a Canadian company. Earlier this year, CNOOC Ltd. agreed to take over OPTI Canada Inc., and Sichuan Bohong Industry Co. moved to buy car parts maker Wescast Industries Inc. But in both of those cases, the Canadian entities were struggling financially. In the case of OPTI, the company’s principal asset was a minority stake in a large oil sands project. In another buyout, the $2-billion purchase of Tanganyika Oil Co Ltd, Sinopec acquired a company whose assets lay outside of Canada.

The Daylight deal is far different, and comes amid a broader trend that has seen Chinese firms turn away from the oil sands, with their enormous costs and environmental risks, and toward so-called “conventional” oil and gas purchases.

The advent of potent, though costly, new drilling techniques has also saddled Canadian companies with more natural gas opportunities than they can finance. Daylight, which has struggled against debt worries and whose executives declined comment, has enough land to drill 100 wells a year for more than two decades. Sinopec brings an enormous wallet to pay for the kind of rapid drilling pace that could double or triple the size of Daylight’s 38,000 barrel-a-day current output, roughly two-thirds of which is gas.

And gas has proven even more attractive as it becomes increasingly clear it will be the first energy product that Canada regularly exports to Asia. One liquefied natural gas export project backed by two U.S. firms and Canadian gas giant Encana Corp. has already begun clearing land for construction near Kitimat, B.C.

“Kitimat LNG is a huge eye-opener for anyone that’s got a vision of five years or more in Canada,” said Rob Lauzon, senior portfolio manager with Middlefield Capital Corp., one of Daylight’s largest owners. He supports the Sinopec purchase.

“They’re not buying Daylight for what’s happening in the next six months. They’re buying Daylight for their five and 10-year plan.”

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/sinopec-bids-22-billion-for-alberta-energy-company/article2196041/

Beware the ripple effect of a slowing Chinese economy

By: AVNER MANDELMAN
Published Friday, Oct. 07, 2011 6:39PM EDT
I like to hear views different than my own for two reasons. First, because I may be wrong, and it’s better to learn this before I invest, not after. Second, because listening to those who are most often wrong reminds me what not to do.
For the second reason, I like to listen to PBS.

A few months ago, one of their star interviewers chatted with a retired South Asian statesmen, an ultra-rich ex-dictator. The PBS reporter deferentially asked the former leader for his views about China. I listened intently as the avuncular politician replied that China was fine and that its current economic stresses were no reason for worry.

I waited for the obvious follow-up questions. How much of your own wealth, Mr. Retired Statesmen, is invested in China? Are you putting your personal money into the country – or taking it out?

The questions never came, alas. So I switched off the TV, and shorted more Chinese stocks.

Which leads me to today’s topic: China’s slowly crumbling economy. You will not hear the talking heads on television speak plainly about the country’s problems. They fear losing access. They’re blinded by the country’s recent success.

Stratfor, a U.S. company specializing in geopolitical analysis, is one of the few observers to deliver a critical assessment. “This Asian giant is reaching a point of crisis,” Stratfor wrote in a report last month. “China’s economic model prioritizes flow-through of money, or growth above profit. Like a Ponzi scheme, it’s exactly the kind of model that breaks down rapidly under crisis.”

I’ve been making a similar point for the last two years. Based on my sources, China’s economy is slowing down. This has important implications not just for those invested in the country but for Canada as well.

As its economy slows, China’s demand for commodities is bound to shrink. So too will commodity prices – and currencies tied to commodities, such as the Canadian dollar and the Australian dollar.

I think the loonie will soon fall below 90 cents (U.S.). On the positive side, this will provide a boost for Canadian exports and attract more tourists to Canada. It means your U.S. investments will be worth more in terms Canadian dollars.

The catch? It will be more expensive to buy foreign goods – including stocks. And those who are heavily invested in China may find themselves saddled with losses.

Part of my skepticism about China emerges from the generally gloomy global outlook. Copper prices are one of the best economic forecasters because of the metal’s widespread use in industry and construction. The recent fall in copper prices is signalling economic weakness around the globe – and that includes China.

Oil prices are also a good indicator of growth prospects and they too have been dropping. West Texas crude has slipped to $83 (U.S.) a barrel from more than $110 this spring, and I think it’s going lower.

Most ominously, loans to Chinese builders are finally coming home to roost. The country’s red-hot property market is showing early signs of cooling, raising the question of whether property developers will ever be able to pay back the large amounts of money they’ve borrowed from Chinese banks and well-heeled investors.

As the government tries to cool off the housing sector, the banks are turning off the taps to developers. Meanwhile, flattening real estate prices are discouraging speculators from advancing short-term loans through so-called “trusts” that lend money against collateralized units.

If big projects are delayed or not sold and speculators start dumping their units, there’s potential for a repeat of the U.S. mortgage blowup, as creditors take ownership of partly finished projects and try to sell them, driving down prices even furrther.

The next few months will tell the tale. Consider Greentown, a real estate company in Hangzhou. It has almost 7 billion renmimbi ($1.1-billion) of cash, but double that amount of debt maturing in less than 12 months.

There are many other developers facing a similar crunch, so the potential for a U.S.-style debacle is not negligible. If China falters, as I expect, and its growth rate slows from more than 9 per cent to 6 per cent or lower, the ripple effects will be felt throughout the global economy – and will be reflected in falling commodity prices and a weaker loonie.

A 90-cent loonie is on the way. Meanwhile, avoid Chinese stocks.

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/the-buy-side/beware-the-ripple-effect-of-a-slowing-chinese-economy/article2195152/

Wall’s scorn for protectionism smacks of hypocrisy

By: BARRIE McKENNA

Posted on Thursday, October 6, 2011 12:08PM EDT- Saskatchewan Premier Brad Wall has joined the howls of Canadian indignation over President Barack Obama’s decision to insert a Buy American clause in his latest jobs plan.“The Canadian and U.S. economies are highly integrated with protectionism causing harm to both economies,” Mr. Wall wrote. “The way forward is to work together in a spirit of co-operation to increase our collective exports.”

A nice sentiment to be sure, and based on sound economics.

As Mr. Wall knows, many U.S. companies have extensive and longstanding chains of supply that reach deep into Canada. U.S. manufacturers often have Canadian subsidiaries that supply vital components to their U.S. operations. 

Cutting off those Canadian suppliers needlessly inflates the cost of government purchases. The result is less good work getting done, lower productivity and lost jobs in both countries.

But, hello. Isn’t this the same Mr. Wall who demanded that Ottawa bend and twist its foreign investment rules to keep Potash Corp. of Saskatchewan -- a widely held public company listed on the TSX -- from falling into foreign hands?

Mr. Wall’s newfound distaste for protectionism smacks of hypocrisy.

Protectionism, in all its guises, and for whatever higher moral purpose, always comes at a price.

Blocked takeovers deprive Canadian shareholders of potentially higher returns they might get from a foreign buyer. They also deter future investment by sending the message to would-be foreign acquirers that their cash isn’t always welcome in Canada.

And protectionism gives Canada’s trading partners cover to shield their own corporate interests from Canadian companies shopping for acquisitions in the world.

And yet somehow, Mr. Wall argues that it’s Saskatchewan that is the model of an open economy that the U.S. Congress should look to us for example.

“We have been working hard to tell the Saskatchewan story around the world to attract investment and make key contacts,” Mr. Wall tells members of Congress. “Saskatchewan's unique position on strategic global issues like energy security and food security has opened many doors. We want to use those open doors to advocate for things like fair procurement.”

Open procurement, but closed investment. Mr. Wall apparently wants it both ways.

The contradiction undercuts the legitimacy of his message.

And that, after all, is the way trade often works. Do unto others as they do to you.
The problem with protectionism is that it has a powerful political and populist appeal, particularly during tough economic times.

Buy American provisions are insidious. They distort trade and cost taxpayers dearly.


But ask Americans what they think, and it’s a clear winner. A 2009 poll by Harris Interactive for the Alliance for American Manufacturing found 84 per cent support for Buy American.

Similarly, ask Canadians about keeping foreigner hands off iconic Canadian companies, and the sentiment isn’t that different. A 2010 Angus Reid Public Opinion poll found strong support among Canadians for blocking the Potash sale. Unscientific online polls by The Globe and Mail showed similarly strong support for Ottawa’s decision.

Mr. Wall shouldn’t be too surprised then that populism trumps economics on Buy American.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/walls-scorn-for-protectionism-smacks-of-hypocrisy/article2193065/

IBM acquires Fredericton tech firm

OCT 5- Another New Brunswick technology startup has been acquired through a lucrative deal by a huge multinational firm, signaling the building momentum and growing reputation of the province's knowledge sector.

Q1 Labs, a firm that started as University of New Brunswick student's work project, was acquired by IBM on Tuesday. Details of the deal weren't released.

Q1 Labs joins Radian6 as the second blockbuster deal involving one of the province's tech startups.

Radian6 was sold to Salesforce.com in March for $276 million plus $50 million in stock.

Q1 Labs has two research and development offices in New Brunswick, one in Fredericton and the other in Saint John, as well as one in Ireland.

Q1 Labs CEO Brendan Hannigan, who will head up the newly formed IBM security systems division, said his firm caught IBM's eye because of the hard work done in New Brunswick.

"That engineering team has had to compete with leading Silicon Valley companies that have come out of California," Hannigan said.

"That was done on the back of that engineering group in Canada."

Q1 Labs started as a project Chris Newton took on while working for the University of New Brunswick during his

studies.

He helped manage the school's network and worked in his spare time to design a system that could identify, record and trace down attacks against the network.

The work grew into a startup company, attracted investors and eventually led to the firm's headquarters moving to Boston.

Q1 Labs now has more than 1,700 customers worldwide, including health-care providers, energy firms, retail organizations,

utility companies, financial institutions, government agencies and educational

institutions.

"If you look at the skills that they have in Fredericton, they're world-class," said Robert LeBlanc, senior vice president of IBM Middleware Software.

He said historically, when IBM moves into a new company or sector, it's the beginning of something new."When we acquire, also we invest, and we increase the investment in strategic areas, and we're going to continue that investment," LeBlanc said.

"If you believe that they've got the skills, there's an opportunity to grow all the teams in all of the facilities around Q1 Labs and IBM."

Brian Flood, one of the first to invest in Q1 Labs, said the deal puts New Brunswick on the map.

"To use a baseball analogy, we crushed it out of the park," Flood said. "Hats off to the team." The firm's

success was a team effort, he said, that will benefit New Brunswick.

"It's a terrific day for New Brunswick," Flood said. IBM said the security systems division will target the growing security software and services market, which it estimates to be worth $94

billion.

The Q1 Labs deal comes amid concerns over cyber-security in the wake of high-profile cyber attacks on

targets ranging from Sony Corp. to the International Monetary

Fund.

In five years, IBM has spent more than $14 billion on 25 deals focused on analytics to help its customers deal with the huge volumes of unstructured data from sources such as social media, biometrics and

criminal databases.

Last month, the company acquired Toronto-based

risk analytics software firm Algorithmics for $387 million in

cash.

Recently, IBM has moved away from personal

computing, instead focusing on

services.

Last week, it briefly surpassed Microsoft to become the world's second-most valuable technology company, with a

market capitalization of $214 billion.

Both still trail Apple, though, whose value has soared to $345 billion on the back of massive demand for iPhones, iPads and Mac computers.

http://www.niuzer.com/Business/IBM-acquires-Fredericton-tech-firm-7535085.html

The bear market is back: TSX swoon tops 20%

Last updated Tuesday, Oct. 04, 2011 7:26AM EDT
By: David Parkinson
It’s the sixth time in less than a month that Canada’s benchmark has suffered a 200-point-plus daily decline. The hectic descent has sliced 12 percent off the value of Canada’s benchmark index since the start of September and that’s just the latest step in a deep downward trend that dates back to early April. On Monday, the total slide since the springtime peak reached 21.2 percent, surpassing the 20-per-cent milestone that traditionally defines a bear market.

Despite Canada’s reputation as a rare bastion of stability in a world of troubles, the Toronto exchange’s heavy exposure to the global economic cycle has rapidly made it one of the world’s have-not stock markets.

 “It has nothing to do with Canada,” said Neil Matheson, senior vice-president of investment strategy at Standard Life Investments in Montreal. “The reaction is more about what’s happened to the outlook for global growth.”

“The issue is not so much the domestic economies in North America, but where our markets are exposed to vulnerabilities elsewhere in the world,” said Myles Zyblock, chief equity strategist at RBC Dominion Securities Inc.

The Canadian stock market depends heavily on commodities, which have gone into full retreat, driven by mounting evidence of a global economic slump, which many fear could be deepened by Europe’s debt problems. Almost half of the S&P/TSX composite is made up of energy and materials stocks, and those sectors have been among the biggest losers as investors lower their expectations for global demand for resources.
Exacerbating the downturn hasbeen a general cashing-out of commodities by hedge funds and other speculative investors. Remembering the lessons of 2008, many of these investors have reduced their risk exposure and raised cash.

John Kurgan, senior market strategist at commodities dealer MF Global Canada, said the TSX’s slide is inextricably linked to oil. “Crude oil really peaked in April, and that’s when we saw the peaks in the TSX,” he said.
After reaching nearly $114 (U.S.) a barrel in New York in April, oil closed Monday at $76.46, a drop of 3.5 per cent on the day and 33 per cent from its peak.

Adding insult to injury, the price of gold –normally a haven in times of financial instability – lost its footing in recent weeks, as it started to look too expensive for increasingly jittery investors. With gold stocks representing roughly 15 per cent of the S&P/TSX composite index, the precious metal’s crumbling support has weighed heavily on the Canadian market.

The slide in oil and other key commodity prices has spurred investors to abandon the Canadian dollar, sending it to a 13-month low against its U.S. counterpart. The falling loonie is yet another knock against Canadian stocks, as foreign investors stand to take home less money when the currency loses value.

“The currency also has a massive correlation with [the price of] oil,” Mr. Matheson said. “I think [the dollar’s decline] reflects all the money that’s leaving.”

The recent slump in all these assets share a common thread: The risk flight among the world’s investors that has been triggered by the deepening worries about Greece’s debt crisis, and its threat to the stability of global financial markets. The fears have sent investors scurrying for the safety of their old stand-by – the U.S. dollar and U.S.-denominated bonds – at the expense of everything else, market strategists said.

“It was not so much a flight to quality as a flight to something very liquid, where at least you know you could get your money back,” Mr. Kurgan said.

http://www.ctv.ca/generic/generated/static/business/article2189668.html