Well, it has been a while since I last reported on done deals. The last time that I actually wrote about a transaction, it was about the Forsys deal which took an unfortunate turn. Today’s deal is a little surreal as it relates to the acquisition of Harvest Energy Trust by South Korean state-run firm Korea National Oil Corp (KNOC). I say surreal as I can’t bring myself to accept that such a premium can be paid for subpar assets.
To be straightforward, KNOC is buying Harvest Energy Trust, a Calgary-based firm that, despite labelling itself the first Canadian energy trust to become an integrated oil and gas company has a fragmented set of assets in the upstream oilsands business and a badly aging petroleum refinery in Come-by-Chance in Newfoundland. KNOC is buying the firm for C $4, 1 billion ($1,8 billion plus the assumption of C. $2.3 billion of debt) representing a 37% premium over Harvest’s share price. KNOC will raise US $1.65 million on domestic and overseas markets. All things considered, the deal comes to about 18$ per barrel equivalent which got many analysts to consider the financials positive.
This deal may align ends and means for South Korea who’s moving towards greater self-sufficiency with regards to its energy supply. However I assume that the deal does not give KNOC much bang for its buck. Production figures for Harvest seem quite modest and the overall quality of the lease is questionable as leases are not contiguous. Additionally, modernization and expansion of the Come by Chance refinery, which had been postponed due to the credit crunch earlier this year, will cost the KNOC $2 billion. As such, there is not such a compelling case for the purchase of Harvest Energy Trust.
What then is driving KNOC’s interest in a firm that comes across as an underdog in view of its average assets and high debt-load? South Korea energy policy goals are motivating the need to take on ownership of more resources; now is a prime time to do so and South Korea has faced a lot of competition from China in its previous bids which all ended in near-misses for South Korea. In that sense, I speculate that Harvest Energy Trust could have been targeted by KNOC as the ugly chick that cannot say no due to its relative absence of other alternatives. It is reported that KNOC has had trouble finding a team for the exploitation of the BlackGold leases that it acquired from Newmont Mining in 2006; the acquisition of Harvest could be seen as a proxy for the development of BlackGold. Additionally, it is possible that Harvest could continue to operate as a trust under KNOC ownership which could possibly exempt the company from paying taxes. If this is not the case, Harvest current tax pools could still shelter the business from taxation for the coming 5 years.