Sunshine Oilsands looks to China in its hunt for capital
After struggling to raise cash in Asia, the junior comes home in search of investment
Larry Bird strolled into the locker room prior to the inaugural three-point shooting competition during the National Basketball Association’s All-Star weekend in 1986 and after sizing up the seven other competitors, the Boston Celtics’ legend quipped: “Man, who’s comin’ in second?”
Think of Sunshine Oilsands Ltd. as the Larry Bird of the Athabasca oil sands. The upstart junior turned heads last year when it went public, not on Bay Street or Wall Street, but on the Hong Kong Stock Exchange. Its chief executive speaks breezily about one day producing more than a million barrels of oil per day, despite a tepid response after the company went public in March 2012.
“The retail uptake was quite modest – less than we anticipated,” says John Zahary, Sunshine’s president and CEO. “We’re a Canadian oil sands story, which isn’t well-known. Even in the U.S., it only really became understood in the last decade. In Hong Kong, Canada is best known for its participation in the Second World War.”
Given that Sunshine currently produces less than one-tenth of one per cent of its million-barrel-per-day goal, aiming for an output equivalent to roughly two-thirds of the total bitumen produced in the province today requires a Larry Bird-like level of confidence. Of course, a secondary listing on the Toronto Stock Exchange late in 2012 and an agreement with China Oilfield Services Ltd. regarding thermal technology development might help too.
Saying sunshine owns a lot of oil sands leases is like saying the Pacific Ocean is a bit damp. Since it started buying land in 2007, the company has acquired more than 1.1 million acres in Alberta and Sunshine ranks as the largest non-partnered leaseholder in the entire Athabasca region. The land holds an estimated 70 billion barrels of oil with roughly 445 million barrels categorized as proven plus probable reserves.
Although it would take more than 2,000 years to get those 445 million barrels out of the ground at the company’s current extraction rate, Sunshine’s leadership knows a thing or two about chasing down opportunity.
Michael Hibberd, one of Sunshine’s founders and current co-chairman of the board, dispenses professional advice to energy companies with gusto: he chairs Heritage Oil PLC, Canacol Energy Ltd., and Greenfields Petroleum Corp., runs his own law firm, and serves as a director of Skope Energy Inc., Montana Exploration Corp. and Pan Orient Energy Corp.
Songning Shen, the other co-founder and co-chairman, boasts a resumé spanning geological work for a subsidiary of CNOOC Ltd., managing exploration for Connacher Oil and Gas Ltd., and performing oil sands assessments for Koch Exploration Canada LP.
Sunshine’s president and CEO also owns a work history that reads like a Rolodex of large oil companies, including stints in senior positions at Imperial Oil, Texaco Canada Inc., Gulf Canada Resources Ltd., Canadian Oil Sands Ltd. and PanCanadian Petroleum Ltd. And before taking the top job at Sunshine, he was president and CEO of Harvest Energy Trust (now Harvest Operations Corp.) when it was bought in 2009 by the state-run Korean National Oil Corp for $4.1 billion.
The minds behind the company, combined with its large resource base, made Sunshine a sponge for private investment before it decided to go public. From its founding in February 2007 until early in 2009, the company raised millions of dollars in North America through private placements.
When the financial crisis turned North American capital flows from gushers into glaciers, Sunshine’s brain trust turned to Shen’s old network of Asian contacts for new money, accepting investment from Tseung Hok Ming’s Orient Holdings Group. Tseung, a seasoned navigator of Hong Kong capital markets, helped bring on other large Asian investors like Sinopec, Bank of China, and China Investment Corp. Tseung today holds a roughly 10 per cent stake in the company, which raised around $300 million overseas privately before going public.
This burgeoning Chinese connection made an Asian stock listing a natural choice. Sunshine initially aimed at a dual Toronto and Hong Kong debut, but quickly ran into difficulties. “What became clear as we started going down the path is that we could not do a simultaneous, dual listing,” Zahary says. “The Toronto system is very similar to the New York system, and the Hong Kong system is very similar to London.”
The London-style exchange rules the Hong Kong market subscribes to require that a debuting company open its books very wide and let the underwriters rummage around under the hood extensively. The process is called verification. Every sentence in a prospectus, which can run to hundreds of pages, gets double-checked by an independent party.
Bay Street and Wall Street, while still demanding some disclosure, ask for far less light to be shone on a debutant’s inner workings. Firms can list on both London- and New York-style exchanges, but they can’t debut on both at the same time. When Zahary’s firm realized a simultaneous listing couldn’t happen, the choice became obvious.
“At the time, Hong Kong was seen as one of the markets in the world with better access to capital,” says Rick Pawluk, a partner with McCarthy Tétrault LLP and the leader of Sunshine’s Canadian legal team through its IPO. “They felt they could raise the money they needed there.”
When Sunshine made its IPO in Hong Kong, that line of thinking proved partially correct. Large institutional investors like AIG and Sinopec eagerly snapped up the stock, but retail investors responded sluggishly, purchasing around a quarter of the stock Sunshine allocated to them. The stock declined by more than one-third in its first nine months on the Hong Kong exchange.
The stock’s performance, which encouraged Sunshine to make a secondary listing on the TSX in November 2012, amounts to a textbook example of the perils of leaving home court in search of capital.
Research from the U.S. Securities and Exchange Commission that surveyed 18,000 IPOs between 1995 and 2007 found that companies making public debuts in foreign markets tend to generate less capital, but possess higher growth potential than firms that debut domestically and later cross-list. Investors usually know less about foreign firms and hesitate to back such unknown horses.
“We tend to invest in companies in our own jurisdiction,” says J. Ari Pandes, who publishes research on stock exchanges when not teaching finance at the University of Calgary. “We know the business model better, we know the government better and we know the market better. If investors don’t really understand the oil sands business model or the commodities business model, you might see reduced liquidity. There’s that double-edged sword that you’ve got to think about.”
Sunshine may have taken a cut or two from that sword in its debut, but the company still has good reason to look on the bright side. Even if the average retail investor in Hong Kong doesn’t know oil sand from quicksand, Sunshine’s ability to explain its business to institutional Asian investors and secure funding from them is well-developed. Despite the lukewarm IPO, the company still generated $580 million in funding in a single day, which surpassed the estimated total budget of its West Ells steam-assisted gravity drainage project, scheduled to start producing oil later this year, by almost $100 million.
Of course, the company also estimates it needs around $35 billion to develop its entire resource base. Its fundraising efforts will need to reach staggering proportions to get there, but management seems to have a few tricks yet up its sleeve. Witness both the secondary listing in Toronto and a formal memorandum of understanding signed with Sinopec last February. The document outlines a possible joint venture that, given Sinopec’s status as one of the largest firms on the planet, could go a long way to resolving Sunshine’s quest for capital.
And that’s precisely what some analysts see as the challenge Sunshine must meet. In a report published late last year, CIBC World Markets Inc. analyst Andrew Potter writes that a joint venture in which Sunshine gave up half its interest in its resource base could boost the stock price by almost 150 per cent.
“Like most early-stage oil sands plays, the company will require substantial external financing to realize its lofty ambitions,” Potter writes. “The main focus and most attractive form of financing is a large-scale joint venture.”
At the 1986 three-point shootout over the NBA’s All-Star weekend, Larry Bird cruised to victory. He didn’t even take off his warm-up jacket until the final round. Bird was in the prime of his Hall of Fame career and he knew none of his peers could match his long-range shooting prowess. It’s not bragging if it’s true.
Sunshine, just taking the court in its own competition, will know soon enough if its confidence rests on stone or sand.
Zahary expresses no regret about his firm’s Hong Kong maneuver, despite the travails of its shares thus far and the hassle associated with debuting on an exchange that operates 15 hours away from its base of operations.
He even predicts future oil sands IPOs will at least consider the Asian option. “Why haven’t others done it? There’s always somebody who has to be the leader, I guess,” he says. “What we need is capital.”