Buying Frac Tech Could Help China Unlock 140 Years of Gas Supplies
China’s quest for shale gas is accelerating. Buying a piece of Frac Tech, a U.S. gas services company, would be a savvy move by China’s national energy majors. Frac Tech’s hydraulic fracturing technology could help China unlock 140 years of gas supplies. The strategic benefits justify a premium price tag.
At a reported $2.2-billion (U.S.) for a 30 per cent stake, the potential deal would value Frac Tech’s equity at $7.3-billion. Add $2-billion of debt, and that puts the company’s enterprise value at $9.3-billion, more than nine times this year’s expected EBITDA. That’s a hefty premium to larger, more diversified oil services companies like Halliburton and Baker Hughes, which trade at closer to five times 2011 EV/EBITDA. Part of the richer valuation can be justified by Frac Tech’s faster growth. But Sinopec and CNOOC also have strong strategic reasons to pay up.
China has up to 1,275 trillion cubic feet of recoverable shale gas reserves, the U.S. Energy Information Administration estimates – a 140-year supply, based on expectations of 2015 demand. Tapping these vast domestic deposits would be a coup for China, which wants to reduce reliance on smog-producing coal. But the country’s shale gas sector is still in its infancy. Commercial exploration only kicked off this year. The initial results look positive, but Chinese energy companies lack the know-how to extract shale gas themselves. Buying into Frac Tech would help close the knowledge gap.
Frac Tech’s technology should be easy to copy. The company makes drills, pumps and chemicals in addition to doing the drilling. Fracturing rock with pressurized water, sand and chemicals to release trapped gas is a brute force activity. The equipment is basic, and while the work can be technically challenging, it is not rocket science. A shortage of engineers and equipment is arguably a bigger challenge to widespread adoption than the technology itself. Chinese companies have already mastered far more difficult technologies, such as networking equipment and high-speed rail.
Financial investors might struggle to justify paying such a price for Frac Tech, which recently filed for an initial public offering. But for China’s energy companies, the strategic logic looks compelling.
Source: The Globe and Mail