Husky assets 'not cheap' for China at $4.4B


PetroChina has been talking to Canada-based Husky Energy about a possible deal

HONG KONG, China -- PetroChina's possible purchase of assets from Canada's Husky Energy would not be cheap at $4.4 billion, according to investment bank CLSA.

But in a research report Wednesday, CLSA said the deal was necessary for PetroChina, the country's top oil and gas producer, to continue to grow.

Beijing-based oil industry sources told Reuters on Tuesday that PetroChina wants to increase its petroleum reserves by buying assets from Husky, Canada's fifth largest integrated oil firm.

Husky issued a statement Tuesday at the request of the Toronto Stock Exchange in which it confirmed it had held discussions with PetroChina and other parties about potential transactions.

"There can be no assurances that any transaction will occur," it said.

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Husky Energy, which was known as Husky Oil until it merged with Renaissance Energy in August 2000, is controlled by Hong Kong billionaire Li Ka-shing and his Hutchison Whampoa conglomerate.

According to CLSA, the reported $4.4 billion price deal between PetroChina and Husky represents $5 per barrel of oil equivalent (boe) reserves versus PetroChina's current valuation of $2.5 per boe.

"The math doesn't look particularly attractive, but overseas acquisitions are the only way PetroChina is going to grow," CLSA analyst Erwin Sanft wrote in the report.

Sanft said PetroChina lacked onshore oil prospects in China, and China's third largest producer CNOOC Ltd had a stranglehold on offshore development. That meant PetroChina was looking abroad for acquisition targets.

CLSA said it was contemplating giving PetroChina a "buy" recommendation and maintained its 2001 earnings forecast of 47.4 billion yuan ($5.7 billion), then 49.6 billion yuan for 2002 and 52.9 billion yuan for 2003.

CLSA's target price for the stock is HK$1.50. PetroChina shares were trading 0.68 percent lower at HK$1.47 in Hong Kong on Wednesday.

Smaller than Sinopec

Both PetroChina and CNOOC are smaller in turnover than China's dominant petroleum and petrochemical company, China Petroleum & Chemical, which is part of the State-owned Sinopec Group. It had revenue of almost $40 billion in 2000, compared with $29 billion for PetroChina and $3.4 billion for CNOOC.

CLSA said PetroChina has $2.5 billion of cash, and if it pays $4.4 billion for Husky assets, its net debt to equity ratio could rise to 33 percent from 19 percent. That is in line with the company's long-term gearing target of 30-40 percent.

But CLSA pointed out that PetroChina lacks international experience.

"Unlike CNOOC Ltd, PetroChina doesn't have a strong track record of working with international oil companies, so there would be question marks over their ability to manage North American assets successfully," Sanft wrote.