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After Novus Energy, are other juniors now in play?

Why one Chinese oil company bought an Alberta junior, and why others might be inclined to do the same

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Sep 11, 2013

by Max Fawcett

At first glance, the recent takeover of Novus Energy by Yanchang Petroleum was an odd transaction. After all, what is China’s fourth largest oil company doing buying a tiny junior producer in Alberta? The answer, according to TriVest Wealth Management’s Martin Pelletier, may be more complicated – and compelling – than you might expect. “To see a large company go down-market is very interesting,” he said during an appearance on BNN yesterday.

It’s interesting, he said, because it reflects the fact that (so far, anyways) the bigger deals that have been done haven’t gone particularly well for Chinese SOEs like PetroChina and Cnooc. “Like a good bottle of wine, you need to give it time to mature,” he said. “We’ve seen some of the results from these acquisitions that were done not that long ago….and I’ve been reading that the Harvest transaction hasn’t been profitable – it’s been losing money.” That’s bad enough for any company, but Pelletier suggested that it’s particularly so for the CEOs of these Chinese firms, which exist in a culture where losing face is seen in a particularly harsh light. “Sometimes it’s better to take less of a risk, and this way you’re more protected that way.”

It doesn’t hurt that smaller companies like Novus have been overlooked by retail investors, and as a result are trading at discounts – often deep ones – to their intrinsic value. “Investors in the public markets have ignored a lot of these companies, and that created an opportunity for an investor such as Yanchang or other SOEs to take advantage of,” Pelletier says. Adding to their appeal is the fact that many of them can be bought without invoking a mandatory review from Investment Canada. Finally, there’s also the technological expertise that a small firm like Novus can bring to a big operator like Yanchang – value that doesn’t exist in Alberta, where virtually every operator is using cutting-edge completion and drilling techniques, but that does in the Chinese domestic market. “They’re far behind the curve in regards to drilling technology, and they want to acquire that expertise,” Pelletier said.

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Other names that might be in play, he said, include Raging River Exploration (CVE:RRX), Renegade Petroleum (CVE:RPL), TriOil Resources (CVE:TOL) and Whitecap Resources (TSE:WCP). And while the possibility of a takeover is intriguing, Pelletier said they’re good investments even if an offer from an international SOE doesn’t materialize. “There’s some value that’s not being recognized across the board for cash-flowing light oil producers who are netting back over $50 a barrel. There’s an opportunity just based on the valuation, and if M&A comes along that’s a nice added bonus.”

 

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