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Jul 24, 2012, 09.23 AM IST
State-controlled CNOOC Ltd launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen Inc for USD 15.1 billion, forcing Ottawa to decide whether security concerns outweigh its desire for foreign investment in its energy resources.
CNOOC, China's third-largest oil company, hopes to sell the deal to shareholders and the government with a hefty 61% premium to Nexen's Friday stock price. It promised to retain all employees and to make Canada home base for its Western Hemisphere operations.
CNOOC is offering USD 27.50 cash a share for Nexen, which has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa.
The initial shareholder reaction was enthusiastic. Shares of Nexen, whose board unanimously approved the deal, surged C$9.06, or 52%, to C$26.35 in Toronto on Monday.
"You won't find a single shareholder on the entire planet, or in the solar system, who is unhappy with this deal," said David Taylor, president and chief investment officer of Taylor Asset Management.
The move is the most ambitious foray by resource-hungry China into North American energy since a 2005 attempt to buy US-based Unocal for USD 18.5 billion was thwarted by a political backlash there.
Chinese companies have been among the most aggressive in targeting assets around the globe to help feed demand in the world's second-biggest economy.
As for Canada, Prime Minister Stephen Harper has pushed to attract more energy investments from China. The CNOOC deal shows his efforts are bearing fruit, and Canada has more reasons to accept the deal than to veto it.
"For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates, which includes the exploitation of bitumen in Alberta," CNOOC Chief Executive Li Fanrong said in a conference call.
"Because we intend to be a local company as much as a global one, we also intend to seek a listing for CNOOC Ltd on the Toronto Stock Exchange."
The deal is subject to a review by the Industry Ministry, which by law must decide if the takeover would bring a "net benefit" to Canada.
In its favor is both CNOOC's commitments to Canada, and the fact that Nexen's operations are mostly outside Canada.
CNOOC has only nine years worth of reserves based on its current production -- one of the lowest ratios among major oil companies worldwide. It said the deal would increase its proven reserves by 30 percent.
"CNOOC has been seeking overseas acquisitions, as the domestic reserves are limited. But there has been many limits, things like foreign companies (being) reluctant to sell, price too high. This deal would be quite a success," said Yan Shi, an oil analyst at brokerage UOB Kay Hian in Shanghai.
The move was quickly followed by another Chinese play for Canadian-owned oil assets, as Sinopec Corp said it would buy 49% of Talisman Energy's
CNOOC already has partnerships with Nexen, once a unit of Occidental Petroleum Corp
Analysts had talked of Nexen as a turnaround story since Kevin Reinhart took over as interim CEO early this year. He won kudos for improving the reliability of such projects as the huge Buzzard oil field in the North Sea after years of missed production targets.
"I've watched this company try to turn itself around for so long," Taylor said. I'm not saying they couldn't have done it this time, I'm just saying that some of their assets are extremely tricky and complicated and there are a lot of unknowns."
Taylor said a rival bid is unlikely to emerge, given the huge premium and the fact that CNOOC is offering all cash.
Nexen is one of his top 10 holdings in the IA Clarington Focused Canadian Equity Class and Focused Balanced Fund.
Yet Nexen's C$6.1 billion Long Lake oil-sands development, for example, is several years behind schedule in reaching capacity production.
Such persistent problems have kept the stock well below the company's net asset value, said Norman MacDonald, vice president and portfolio manager at Invesco Trimark.
Tags: CNOOC, China, foreign takeover bid, Canadian oil producer, Nexen, North Sea, Gulf of Mexico, West Africa, Brent oil
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