South Korea wins biggest energy deal with Canada's Harvest

By Cho Mee-young and Michael Erman

SEOUL/NEW YORK (Reuters) - South Korea ended a frustrating losing streak in overseas resource deals with the agreed $1.7 billion takeover of Canada's Harvest Energy Trust (HTE_u.TO) (HTE.N), securing oil and gas reserves but also taking on an aging refinery in need of significant investment.

State-run Korea National Oil Corp, which has narrowly lost out to Chinese rivals in several big deals, will pay a 37 percent premium over Harvest's share price to buy the Calgary-based firm, which produces 35,000 barrels per day (bpd) of oil and 18,400 bpd gas. It will also assume C$2.3 billion of debt.

South Korea's biggest yet overseas energy deal will bring the world's fifth-largest crude oil importer a few steps closer to its goal of producing the equivalent of 18.1 percent of its oil and gas demand by 2012, and may be swiftly followed by more.

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

Seoul was a latecomer to the great resources acquisition race -- a supply security strategy pioneered by Japan in the 1970s and revived by China and India this decade -- but is hoping to capitalize on the recession to pick up assets on the cheap.

Analysts said the financials on its Harvest acquisition looked positive, although it will be saddled with the 115,000 bpd Come-by-Chance refinery in Newfoundland and Labrador, for which a much-needed C$2 billion expansion project was shelved last year due to the onset of the credit crunch.

"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 appropriate average price for such deals," Jae-joong Kim, senior 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 Alberta, Canada, the deal works out to approximately $18 per barrel equivalent.

The deal, on which KNOC was advised by Merrill Lynch-Bank of America (BAC.N), will increase South Korea's self-sufficiency rate -- the amount of oil its companies produce versus its demand -- to 8.1 percent from 6.3 percent. It will now own 3.02 billion barrels of proved oil reserves and produce 241,000 bpd.

KNOC will raise US$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 M&As 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

KNOC ended a streak of near-miss deals by paying C$10 for every Harvest unit, representing a 37 percent premium over Wednesday's closing price.

The deal is subject to court and regulatory approval, and it requires approval by two-thirds of Harvest's unitholders represented voting on the deal.