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Calgary financier says China is still hot for Canadian energy

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| April 30, 2013

Merger and acquisition activity in the global oil and gas sector may have slowed from last year’s record-breaking pace, according to data released earlier this month by Houston-based PLS Inc. and partner Derrick Petroleum Services.

But one Calgary-based financier is betting that China and other south Asian countries have not lost their appetite for Canadian energy, even after the recent completion of China National Offshore Oil Corp’s (CNOOC) (NYSE: CEO, Stock Forum) $17.9 billion purchase of Nexen Inc. 

Next week, Emerging Equities President James Hartwell will fly to China for talks with local interests who he says are eyeing resource assets in the Alberta oilpatch and have already been to Canada for check out the scene for themselves. 

“I’m actually on my way to Beijing on May 5 to discuss specific opportunities that I hope to advance dramatically on that trip,’’ he said during an interview with Stockhouse.

Click to enlargeA successful Chinese deal would be a first for Emerging Equities, which was launched in 1998 with the purpose of underwriting emerging oil patch companies. 

The company is an employee-owned firm. At the age of 56, Hartwell (pictured to the right) owns 78% of the shares.

But due to fierce competition in the sector, almost half of the company’s revenue is being generated from its work as a financial advisor in merger and acquisition transactions, asset dispositions and corporate acquisitions.

As the upcoming trip to China would suggest, some of the work involves using relationships that Hartwell has developed over 30 years in the investment business, recently as head of Emerging Equities and earlier as the guy who set up Canaccord Financial Inc.’s (TSX: T.CF, Stock Forum) first Calgary office in 1994.

A native of Tyler Texas, Hartwell moved to Calgary at the age of 4, and got his start in 1981 with Goulding Rose and Turner, an investment firm that was swallowed by Walwyn Stodgell Cochran Murray Ltd. in 1983.

He is not deterred by the Canadian government’s warning to foreign state owned enterprises following Ottawa’s decision in December 2012 to approve CNOOC Ltd.’s (NYSE: CEO, Stock Forum) $17.9 billion purchase of Nexen, and a $5.2 billion bid by Malaysian state-owned oil company Petronas for Progress Energy Resources Corp. (TSX: T.PRQ, Stock Forum).

While giving the green light to those deals, Canadian Prime Minister Stephen Harper said the decision should not be seen as an invitation to foreign government’s seeking to control large slices of Canada’s oilpatch.

“Canadians have not spent years reducing the ownership of sectors of the economy by our own governments only to see them being bought and controlled by foreign governments instead,’’ he said.

Looking around, Hartwell says future takeover candidates might include the likes of Penn West Petroleum Ltd. (TSX: T.PWT, Stock Forum) and Penn Growth Energy Corp. (TSX: T.PGF, Stock Forum), companies that could be swallowed up within the next 12 months.

However, he expects to see strong interest in smaller companies with market caps below $300 million, where Federal government approval would not be required in order to get deals done.

In situations where target companies have market caps above the $300 million, Hartwell thinks the focus will be on conventional energy outside of the oilsands.

Finding the right buyers in Asia for Canadian assets takes a certain amount of patience, says Hartwell adding that his firm has two or three joint ventures with parties where they have fee splitting arrangements with people who have full time people in China.

“You have to spend a lot of time on evaluations and relationships. But it’s worth the effort,’’ he said.

“From our perspective if we are getting 1% success fees on M&A transactions, it’s a very healthy living.”

Hartwell believes the long term goal of Chinese investors is to have access to the commodity in physical form.

“In the interim, they are diversifying their investments in what is perceived to be a relatively stable country (Canada).’’

Closer to home, Emerging Equities is under contract on two going private transactions, Hartwell said. One is in exploration and production. The other is in the service sector.

As in previous such transactions, Emerging Equities will fund a special purpose corporation, pay for the cost of a prospectors and source an offer from private equity groups, permitting an offer to be made to shareholders.

In each case, Hartwell is looking to underwritings worth over $30 million.

 “The successful completion of those will allow us to have our best year ever,’’ he said.

Since its inception in February 1998, Emerging Equities has done roughly $2 billion worth of M&A work and raised close to $1 billion worth of equity for junior resource companies.

The firm’s last significant financing was almost a year ago, when it underwrote a $23 million convertible debenture financing for Exall Energy Corp. (TSX: T.EE, Stock Forum) in partnership with Stonecap Securities Inc.

Proceeds were earmarked for Exall’s light oil exploration and development program in Mitsue, Alberta.

More recently, Emerging Equities has published research on Manitok Energy Inc. (TSX: V.MEI, Stock Forum), Arsenal Energy Inc. (TSX: T.AEI, Stock Forum) and Invicta Energy Corp. (TSX: V.VCA, Stock Forum).

“Some of the names we like are Manitok, Traverse Energy Ltd. (TSX: V.TVL, Stock Forum), Hemisphere Energy Corp. (TSX: V.HME, Stock Forum), and DeeThree Exploration Ltd. (TSX: T.DTX, Stock Forum),’’ Hartwell said.

Emerging Equities still has a significant position in companies like Surge Energy Inc. (TSX: T.SGY, Stock Forum), Arsenal, Exall, Bellatrix Exploration Ltd. (TSX: T.BXE, Stock Forum) and Whitecap Resources Inc. (TSX: T.WCP, Stock Forum).


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