Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Sinopec Buys Daylight Energy In Chinese Bid For Dominance

|Includes:DAYYF, China Petroleum & Chemical Corporation (SNP)

China's five-year plan must be a fun read. It's worth wondering whether the chapter on resource acquisition specifies penetration of North America. Sinopec is buying Daylight Energy for C$2.2B. The real news is how Sinopec will control its North American assets .

Daylight's properties hold 174mm boe in proven and probable reserves, according the company's 2010 annual report. These assets are primarily in mature fields in Western Canada and require techniques like fracking to force oil into production. Dividing those reserves into the acquisition price means Sinopec is paying about C$12.64/boe, an incredible bargain to the 2010 average oil price of C$74.62/bbl. Granted, only 21% of those 2P reserves are crude oil and the rest is natural gas. Still, Daylight was able to realize prices in 2010 for its NGL and natural gas that were consistently higher than average market prices. This indicates it is a well-run company.

Sinopec (NYSE:SNP) is majority-owned by the People's Republic of China. Its senior officers are Communist Party officials who provide input on energy matters to China's senior political leadership. This buyout is a strategic action by the Chinese government. Daylight's 2P reserves are a drop in Sinopec's bucket (BTW, the Chinese convention of measuring reserves in tons and not boe is irritating). The real agenda behind this acquisition is to establish further precedent under Canadian law and WTO rules for Chinese acquisition of North American natural resources.

It is relevant to consider how this acquisition factors into Chinese national strategy. Acquisitions outside China allow the curtailment of production within China to husband resources for future use, i.e., in wartime, when foreign supplies might be unreliable. Non-Chinese resources can also be denied to China's competitors in the event China needs to exercise influence. It would behoove the Canadian government to review Sinopec's proposed acquisition of Daylight Energy under the Investment Canada Act in light of these security concerns.

Full disclosure: No positions in SNP or Daylight Energy at this time.

Stocks: SNP, DAYYF