Contemplating the present and future of Chinese foreign direct investment in Texas
by J. Chase Beakley
As the commodity price drought lengthened, it became clear that a substantial decline in willing capital would have a profound effect on the Texas oil industry. Some believed an outbreak of M&A might save struggling companies, but for most of 2016 the value gap between buyers and sellers proved too large to bridge. Many over-leveraged firms were forced to hide under the umbrella of Chapter 11, and despite a few halfhearted rallies during the summer, oil prices don’t look likely to make a significant improvement any time soon.
And yet, persistent stagnation hasn’t deterred foreign direct investment (FDI) in Texas, especially from China. Reports issued by Blacklight Research and the Rhodium Consulting Group show that $15 billion of Chinese foreign direct investment flowed into the United States last year, and this year Chinese investments are sure to top that figure. Fully $30 billion worth of deals are still pending countrywide, and Texas is poised to be a big recipient of those funds at a time when the state economy needs it most.
Large sum FDI usually comes in the form of mergers and acquisitions. In 2015, Rhodium reports, Chinese companies completed more than 100 M&A deals in the United States, totaling $13.5 billion, 90 percent of the total Chinese FDI.
One of the biggest was real estate developer Yantai Xinchao’s $1.3 billion acquisition of resource properties from Basin-based firms Tall City Exploration and Plymouth Petroleum. Before the Xinchao deal, China National Offshore Oil Company’s $1.08 billion purchase in the Eagle Ford and Sinochem’s $500 million Wolfcamp acquisitions were the largest Chinese oil and gas investments in Texas. After their groundbreaking purchase, Xinchao has remained an aggressive buyer in Texas, looking for not just participation but operating interest in the properties it acquires.
In addition to M&A growth, greenfield purchases by Chinese firms have been on the rise and Texas oil and gas was again responsible for one of the biggest. In 2011, Chinese pipeline company Tianjin Pipe Corporation (TPCO) broke ground on a $1.3 billion manufacturing plant in Gregory, Texas, just outside of Corpus Christi. Gregory was selected to be TPCO’s Texas base because of its close proximity to both the Gulf and the nearby Eagle Ford shale formation that TPCO hoped would provide a steady customer base for years to come. Although the Eagle Ford has slowed down considerably since construction began, TPCO has been steadfast and the plant is on schedule to come online in early 2017. When it does, it’s projected to create 600 jobs and produce $2.7 billion in economic impact over ten years.
In order to seal these deals, Chinese companies and their affiliates have to jump through a few hoops. Each transaction must be approved by the Committee on Foreign Investment in the United States (CFIUS), which weighs the national security challenges of foreign purchases on American soil. That process takes 90 days and can scare sellers into backing out or provide a window for other buyers to move in.
Still, market forces have combined to make Chinese FDI in Texas a much more common occurrence. The Chinese economy has struggled to regain momentum of late and both Chinese companies and private investment groups are looking to park assets offshore to escape taxation and seek new opportunities. With less U.S. capital flowing, the door is wide open for Chinese investors to make waves.
So how will increased Chinese FDI change the topography of Texas’ energy industry? In the Blacklight report, Colin Fenton argues that increased Chinese ownership of resources in Texas will prompt the United States into supplying China with oil down the road. “Partial control of Texan oilfields and energy-oriented infrastructure by Chinese entities will increase the probability that the United States, especially Texas, becomes a larger supplier of crude oil and other hydrocarbons to China over time,” says Fenton. Currently, the United States is just China’s 30th largest vendor of crude. Considering our trade imbalance, it only makes sense to expect the United States to climb the ranks in the future.
Fenton also predicts that mega deals by Chinese companies will pave the way for more individual Chinese investment in the future. Private land and resource purchases are more difficult to track, but there is anecdotal evidence to suggest that more Chinese families are seeing Texas land as a safe asset to anchor their portfolios. The case could be also made that Chinese investment in energy properties will only increase once commodity prices start to trend in the right direction again. CFIUS regulations and time constraints will still be additional barriers for Chinese entities, but as assets start to appreciate, expect aggressive purchasers with excess liquidity to make additional purchases in Texas.
Only time will reveal if Chinese FDI in the United States really has doubled year over year, but the facts already in evidence suggest that Chinese entities will only grow in stature in the Texas acquisition market in the future.
Chase Beakley is a business journalist based in Dallas, TX. He can be reached via Twitter, @ChaseBeakley.