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Conoco gets top dollar for oil sands stake

China's Sinopec pays 10 per cent more for minority slice of Syncrude than markets say stake is worth

China's biggest refiner sees something in the oil sands that the rest of us are missing, as the company paid a massive premium yesterday for a thin 9-per-cent stake in Syncrude Canada.

State-owned China Petroleum & Chemical Corp., better known as Sinopec, agreed to pay $4.65-billion (U.S.) for an oil sands holding that ConocoPhillips deemed excess baggage. There were at least two credible domestic bidders for the Syncrude stake, according to bankers in Calgary, but neither came close to offering what Sinopec paid. One local buyer was a coalition of public pension funds, and the second was Calgary-based Canadian Oil Sands Trust, which already owns 36 per cent of Syncrude.

This deal invites revisiting the way oil sands assets are valued. Syncrude, after all, has got more press lately for ducks that died in its tailing ponds than its financial fundamentals. With all due respect to our feathered friends, either public markets are missing something on this energy play, or some of Asia's biggest firms are delusional.

Here's some math to explain just how highly Sinopec values Syncrude, which claims 5.1 billion barrels of proven and probable oil reserves.

Canadian Oil Sands units rose yesterday on news of the Sinopec offer. That rally was partly due to the fact the trust was widely expected to win this auction, and dilute existing investors by issuing new units to pay for the purchase.

Even after rising 5 per cent yesterday, Canadian Oil Sands, with its 36-per-cent stake in Syncrude, had a market capitalization of $15.8-billion. Add in debt at the trust, and the total enterprise value of Canadian Oil Sands is $16.8-billion.

Use Sinopec's price on a stake in Syncrude that's a quarter the size, Canadian Oil Sands should boast an $18.6-billion market capitalization.

On this metric, Sinopec is paying 10 per cent more for a minority slice of Syncrude than Canadian public markets say the stake is worth. It would be extremely difficult for Canadian Oil Sands to justify paying this price for additional exposure to Syncrude. Using the valuation of its own units as a guide, the domestic trust would have bid $4.2-billion.

So full marks to ConocoPhillips' advisers for getting top dollar for this asset. Credit Suisse was the financial adviser, and Osler Hoskin and Harcourt did the legal work.

Of course, there are two ways to look at the Syncrude valuation. Those with faith in public markets would say Sinopec just overpaid. It's also possible to argue that public investors do not recognize the long-term strategic value of the oil sands.

After crunching the numbers on the Sinopec offer, Randy Ollenberger at BMO Nesbitt Burns pumped out a note that says: "The implied equity value for Canadian Oil Sands would be roughly $37 per share."

When it comes to the pension funds' bid for ConocoPhillips' stake in Syncrude, talk in Calgary's finance circles yesterday has the Sinopec offer coming at a far higher price than what the local money managers put on the table.

This coalition of Canadian public sector pension plans included the usual suspects: Ontario Teachers' Pension Plan and the like.

There is chatter that the pension fund coalition suffered setbacks in the last stages of the bidding process, with one of the funds opting to pull out, but the issue is now all but academic, as the price contemplated by domestic funds was also well below the winning bid.

The deal still requires government approval. But given the regulatory thumbs-up for recent Canadian energy acquisitions by state-owned Asian firms, that approval should be easy to obtain.

After all, Sinopec is bidding for a minority position in an asset already run by a foreign company. Exxon Mobil-controlled Imperial Oil is the operator at Syncrude.

100WHF in Toronto

Canada's alternative asset community got a boost yesterday as a global organization with the somewhat misleading name of 100 Women in Hedge Funds opened its first chapter here.

The "100WHF" name is a tad dated, as this educational and philanthropic movement has grown to more than 10,000 members since being founded nine years ago in New York City. And the group is open to guys, who can qualify as "supporters" of the group. One such patron is Britain's Prince William, who has built strong charity ties to 100WHF, which has donated $17-million to various groups since 2001.

To introduce this global organization to local hedge fund managers and those who serve them, UBS Securities picked up the tab last night for a cocktail party in Toronto. New York-based 100WHF executive director Amanda Pullinger was at the event yesterday to celebrate the new the Canadian presence - Toronto is the 14th city to host a volunteer-staffed team, and she highlighted plans to bring top-tier alternative asset executives to Canada in the near future. See Andrew Willis's Streetwise Blog at

© 2007 The Globe and Mail. All rights reserved.

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