China Petrochemical Corporation (Sinopec) has started the new year with yet another significant international acquisition, this time agreeing to invest up to $2.5 billion for a one-third stake in five US oil shale projects owned by Devon Energy.
Sinopec International Petroleum Exploration and Production Corp, a wholly owned subsidiary of state-owned Sinopec, will pay Devon $900 million in cash for its stake in the projects — 1.2 million acres covering the Tuscaloosa Marine Shale, the Niobrara, the Mississippian, Ohio Utica Shale and the Michigan Basin — and as much as $1.6 billion in the form of a drilling carry that will fund 70% of Devon’s capital requirements and results in Sinopec paying 80% of the overall development costs during the carry period.
Based on the current work plan, Devon expects the entire $1.6 billion carry to be realised by year-end 2014, the company said in a statement, adding that it expects to drill about 125 gross wells in the five plays.
“While we are still in the early stages of derisking these plays, the tremendous response by industry to our data room process clearly underscores the attractiveness of this opportunity,” said Dave Hager, Devon’s executive vice president of exploration and production. “We believe our strong acreage positions in these plays, our reputation as a quality operator and the uniqueness of the opportunity for exposure to five different plays in a single venture make this a compelling value proposition.”
Devon will serve as the operator and will have ultimate responsibility for the allocation of capital. The company is also responsible for commercially marketing all production from these projects into the North American market. The deal is expected to close before the end of the first quarter, subject to government and regulatory approvals.
After staying quiet for much of 2011, Sinopec paid C$2.2 billion ($2.1 billion) in October for Daylight Energy, an oil and natural gas producer with assets in Alberta and British Columbia in Canada.
Early in 2010, Sinopec bought a 9.03% equity interest in ConocoPhillips oil sands project Syncrude, also located in Alberta, for $4.65 billion. Syncrude is the biggest oil sands project in the world. Later in the year, Sinopec forged an $18 billion joint venture with Repsol, an independent upstream-oil operator in Brazil. Sinopec paid $7.1 billion for a 40% stake in the JV.
Such acquisitions are expected to continue thanks to China’s healthy reserves position, which means that its acquirers can be confident of funding for both the deals and future development needs. Indeed, respondents to our annual M&A survey, which we published in October, predicted that outbound deals from China's companies in the natural resources sector will remain a defining feature of Asia's M&A landscape.
Credit Suisse advised Sinopec on the transaction, with legal advice from Fulbright & Jaworski. Devon did not hire outside financial advisers but sought legal advice from Vinson & Elkins.