UPDATE 4-KNOC to buy Harvest Energy for C$1.8 bln

Thu Oct 22, 2009 11:39am EDT

* KNOC also takes on C$2.3 bln in Harvest debt

* South Korea's biggest overseas energy deal

* Purchase gains reserves, Come by Chance refinery

* Korea says likely to buy one more oil firm this year (Adds Harvest stock reaction, analyst comments; in U.S. dollars unless noted)

By Cho Mee-young and Michael Erman

SEOUL/NEW YORK, Oct 22 (Reuters) - South Korea ended a losing streak in overseas resource deals with the C$1.8 billion ($1.7 billion) friendly takeover of Canada's Harvest Energy Trust HTE_u.TO, securing oil and gas reserves as well as a refinery that Harvest could not afford to expand.

In the latest in a series of acquisitions of Canadian assets by Asian state companies, Korea National Oil Corp will pay C$10 a trust unit for Harvest and assume C$2.3 billion of long-term debt.

The bid represented a 37 percent premium over Wednesday's price for Harvest, which produces 53,400 barrels of oil equivalent a day in Western Canada and operates the 115,000 barrel a day Come By Chance refinery in Newfoundland and Labrador on Canada's Atlantic coast.

Harvest had planned a C$2 billion expansion of that plant, but shelved it last year due to the credit crunch.

Its units have lagged those of its rivals because of its debt load, undercapitalized assets and volatile cash flow from the refinery, UBS analyst Travis Wood said.

Harvest units surged C$2.45, or 33 percent, to C$9.75 on the Toronto Stock Exchange on Thursday morning, a price that suggests investors see slim odds of a counter bid.

BIG DEAL FOR SOUTH KOREA

It is South Korea's biggest overseas energy deal, and it will bring the world's No. 5 oil importer a few steps closer to its goal of producing the equivalent of 18.1 percent of its oil and gas needs by 2012. More might be on tap.

"KNOC is likely to acquire one more oil company within this year," Kim Jung-gwan, deputy minister at the Korea Ministry of Knowledge Economy, said in a press briefing.

Seoul was late to the resource acquisition race but hopes to capitalize on the recession to pick up assets cheaply.

Analysts said the financials on the Harvest deal looked positive for KNOC on a per-barrel basis.

"Although we have to take a closer look at reserve quality and production costs, the price seems reasonable, as Canada has no political risks in developments and the market usually considers around $13 a barrel an appropriate average price for such deals," said Jae-joong Kim, an analyst at Woori Investment & Securities. "This deal shows KNOC seems quite aggressive."

Based on the total equity plus debt value of the deal and Harvest's 219.9 million barrels of proved onshore oil and gas reserves, mostly in the western province of Alberta, the deal works out to about $18 per barrel equivalent.

KNOC will raise $1.65 billion in domestic and overseas markets by additional borrowing to finance the deal, while the remainder would be paid by the company's current capital.

"We expect both buying overseas oil fields and seeking (mergers and acquisitions) will accelerate as we have secured the base in Calgary, Canada, the center of North American oil development business," the Korean government statement said.

KNOC, which will be able to produce 120,000 bpd of oil after the deal, is set to reach its capacity target of 300,000 barrels earlier than planned in 2012, industry experts said, as the company is in talks with another four to five companies.

ALWAYS THE BRIDESMAID

The deal is subject to court and regulatory approvals, and the support of Harvest unitholders. Harvest's board said it will vote the 7 million units it holds in favor of the deal. Harvest has 180.6 million units outstanding, according to Reuters data.

KNOC had narrowly lost out to Chinese oil giant Sinopec (600028.SS) in a bid for Swiss-based oil explorer Addax Petroleum Corp this summer. [ID:nBNG477261] [ID:nHKG50314]

The company made an earlier foray into Canada in 2006, buying an oil sands property from U.S. gold producer Newmont Mining Corp (NEM.N) for $270 million.

In February, KNOC paid half of the $900 million price tag for a 50 percent stake in Petro-Tech, owned by private U.S. firm Offshore International Group. [ID:nN10308942] ($1=$1.04 Canadian) (Additional reporting by Jeffrey Jones; editing by Jonathan Leff and Rob Wilson)