Korea Joins China in Foreign Oil Acquisitions in Americas

Harvest Energy Trust (NYSE: HTE) is a Canadian energy trust that has gone unnoticed by many Americans.  Yet today it is one of the top percentage gainers because the trust is being acquired by Korea National Oil Corp. in South Korea.  It seems that South Korea is joining in following the waves of Chinese acquisitions of oil and energy sources located throughout the world.  We have noted China’s insatiable appetite of securing these raw energy assets, and common sense would dictate that only more deals will come down the pipe.

Harvest offers exposure to upstream oil and natural gas production and downstream refining and marketing operations with monthly distributions and unit price appreciation distribution to unitholders.  The trust has made acquisitions of its own and its crude oil and natural gas production business is weighted approximately 70% to crude oil and liquids and 30% to natural gas.  Its model also includes its medium gravity sour crude oil refinery.

Harvest produces about 53,000 barrels of oil equivalent per day and operates what is roughly a 115,000 barrel per day refinery.  Harvest was going to increase the size of this refinery with a significant C$2 billion plant expansion, but the credit crunch and lower energy prices got in the way.  It seems that the Koreans will not have the same issues in expanding that plant if and when they choose to.

By our count, this is the largest deal we have seen from South Korea in North America, but is dwarfed by the international Chinese acquisitions we have seen.  South Korea is a huge importer of its oil, and this will bring more of that in-house so to speak.  And the Koreans have signaled that there may be more acquisitions.

“KNOC” will pay C$10.00 per trust unit and will assume C$2.3 billion of Harvest’s long-term debt.  Harvest listed its 219.9 million barrels of oil equivalents in proved and probable reserves as of 2008-end.  That puts the per-barrel US-Dollar buyout cost around $18.20 per barrel if you include the debt in the tally along with the equity.  That does not include other reserves which are considered unproven.  The acquisition is subject to court and regulatory approvals and subject to vote of the unitholders.

Canada also seems easier to acquire into compared to the U.S.  China’s Sinopec acquired  in a bid for Swiss-based oil explorer Addax Petroleum Corp this summer.  KNOC joined Ecopetrol S.A. for half of the $900 total paid for half of a U.S. private equity offshore entity called Petro-Tech with operations in Peru.

The only real surprise here is that both the Koreans and the Chinese did not take advantage of depressed asset prices (stocks) and commodity prices (oil) sooner.  We have seen various reports from ministers in China in recent months noting how many assets were starting to look cheap.

JON C. OGG