Novus Energy Takeover Underscores Chinese Preference for Canadian Acquisitions

The proposed acquisition of Novus Energy (CVE:NVS) is a welcome win for shareholders. A wholly owned subsidiary of Yanchang Petroleum Group Ltd. (HKG:0346) will acquire the company for $1.18 per share, representing a 44% premium. The $320 million deal represents a sale price of about $85,000 per flowing barrel of oil equivalent. The company’s recently reported second quarter results showed increased production over the same period in 2012 with slightly higher operational and transportation costs.

Canada has seen a growing number of resource corporations that were built by Canadians disappear into larger multi-nationals. We certainly don’t see this trend south of the border, and the reasons we don’t points to a dysfunctionality in Canadian equity markets that is focused on selling off producing assets for short term gain. But what will be the impact of such easy foreign acquisition policy for the future Canada?

One could argue that Canada is being incrementally colonized by China, and certainly there is a propensity for Chinese firms operating in the resource space in Canada to prefer importing cheaper, less demanding workers from China, who silently accept longer hours and lower wages just to escape the crushing poverty of their own homeland.

By permitting such swapping out of Canadian citizens for cheap Chinese labour, we are importing the structures that foster poverty, and we risk importing lower environmental standards and higher levels of corruption such as those known to exist in China. The increase in income inequality has been greater in Canada than in the U.S. since the mid-1990s, according to a statement by the Conference Board of Canada.

And we must also consider what the obligation of the current generation is to ensure sufficient availability of hydrocarbon energy for future generations. If world hydrocarbon energy resources start to grow scarce, will Canadian oil be finding its way to China despite Canadian needs?

These are aspects of increasing corporate colonization that are not part of the public discourse, and certainly form no part of the government’s deliberations.

Canada Lacking Infrastructure
One of the reasons Canadian assets are available at a discount relative to U.S. ones has to do with the deficiency in transportation, refining, and exporting infrastructure. Currently Canadian netbacks are tremendously lower than those received in the southern United States because Canada lacks pipelines to carry crude south to the refining heartland in the southeastern U.S. or to BC ports for direct export.

We also suffer from an absence of refining capacity, due in large part to the very high capex requirements of new refineries, and the famously thin margins that refineries operate on.

All of which points to an incoherent National Energy Policy, which undermines investment in such infrastructure, and enforces a future of inferior returns for Canadian oil. Due to the massive mis-investment in oil sands by our leading financial institutions, Canadian political will is focused on ensuring the current inefficient structure whereby oilsands crude is shipped south and producers here sell their product at a discount.

Despite entrenched environmental opposition to pipelines and export terminals on the coast of British Columbia, projects are moving forward both in terms of pipelines and LNG terminals.

This harkens back to Canada’s legacy timber issue (from which we apparently retained nothing) where we sold high value logs in their entirety to Japan, undermining Canadian economic potential by not investing in the infrastructure to make higher value finished lumber products.

So while deals like this are a win for some Canadians, for Canada and its future, its a loss.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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