Where China Sees Oil Prices

 |  Includes: COSWF, SHI
by: Streetwise Blog

By Andrew Willis

Canadian energy executives are going to differing political views on the latest oil sands acquisition by a state-owned Asian entity; the trend makes a whole lot of folks uneasy.

But everyone in the oil patch will welcome the economics behind Sinopec’s (NYSE:SHI) $4.65-billion (U.S.) purchase of a 9 per cent stake in Syncrude. The valuation on this deal shows China’s largest refiner has a bullish long-term view on energy prices, and the potential of the oil sands.

In our minds, the Sinopec deal reflects the appetite and lower cost of capital of eager Chinese buyers,” said a report from energy analyst Greg Pardy at RBC Dominion Securities.

After running the numbers, with an 8.5 per cent tax discount rate, Mr. Pardy concluded the $4.65 billion price tag on this deal imples a long-term oil price of $95 a barrel.

At Peters & Co., analyst Jeff Martin used a 10 per cent tax discount rate for his projections, and concluded the Sinopec purchase is based on a $106-a-barrel expectation on oil.

Both analysts said the Sinopec deal highlights the value of Canadian Oil Sands Trust (OTCQX:COSWF), which owns 36 per cent of Syncrude. RBC Dominion has a $34.50 one-year target price on units, while Peters & Co. raised its target price on Monday to $37.50 from $35.