Cnooc Nexen

Canada approves Cnooc’s Nexen acquisition

Canada’s leaders defy domestic support for resource nationalism and allow Cnooc’s purchase of Nexen and Petronas’s takeover of Progress to go ahead.
British Columbia's Horn River Basin is one of Nexen's biggest shale gas resources

The Canadian government has approved a $15.1 billion bid from China National Offshore Oil Corporation (Cnooc) to buy Nexen, a deal that has highlighted China’s worldwide pursuit of natural resources and energy assets.

It is the biggest overseas acquisition ever made by a Chinese company, and was announced on July 23 and later agreed by Nexen shareholders. Endorsement by the Canadian industry ministry and Prime Minister Stephen Harper on Friday came after months of argument in Canada and concern in the US.

Approval of the takeover “recognises the long-term economic benefits for Calgary, for Alberta and for Canada. Our company will also benefit by adding Nexen’s impressive assets and outstanding employees to our worldwide operations”, said Wang Yilin, chairman of Cnooc, in a statement on Saturday.

“This is an important milestone in the process and confirms our belief that this transaction provides a number of significant benefits to Canada and to Nexen,” agreed Kevin Reinhart, Nexen’s interim president and CEO.

The takeover will increase state-owned Cnooc’s stake in Nexen’s Long Lake Island oil-sands project and give it access to the Syncrude project, both in Alberta. In addition, it will gain shale gas reserves in British Columbia and Usan, a deepwater development off the coast of Nigeria.

It will also mean that the company, China’s biggest offshore oil producer, will control 8% of the UK’s North Sea oil production through a 43% holding of the Buzzard field, which required official clearance.

The European Commission approved the deal on Friday under the EU Merger Regulation, but Cnooc may need to pass a UK test of “competence”, and will have to abide by British rules and regulations.

There now seems little to prevent the deal from completing. In 2005, Cnooc launched a hostile bid for Unocal that was rejected due to political opposition in the US.

But, “unlike the Unocal deal, Canada, not the US, is the key regulatory approval; and with this now in place the deal is almost certain to go forward”, said David Hewitt, managing director, co-head of oil and gas equity research at Credit Suisse.

“As we enter 2013, Cnooc investors will begin to focus on production reliability at the Buzzard field and production growth at the Long Lake facility in Canada,” he added.

At the same time, Canada gave the go-ahead for Malaysia’s Petroliam Nasional (Petronas) to buy Progress Energy Resources for C$5.2 billion ($5.2 billion). State-owned Petronas had offered a 77% premium to the pre-bid share price of the Calgary-based upstream gas producer in June and had gained shareholder approval.

However, official clearance of the two acquisitions is unlikely to usher in a more permissible takeover regime. Harper told reporters after the announcements that Canada will not approve state-owned companies taking controlling interests in any more oil-sands projects, except in “exceptional circumstances”.

Cnooc and Petronas had to pass a “net-benefit” test to gain the government’s assent. Canada is keen to diversify its energy exports away from the US to other regions including Asia and also needs investment in its oil and gas sector. During a visit to China in February, Harper publicly welcomed Chinese investment in the Canadian oil and gas sector. However, he also wants to avoid back-door foreign government control of its prized assets.

At the outset, Cnooc had tried to assuage nationalist anxieties. It had accepted management and employment conditions set by the government, agreed to list its shares on the Toronto Stock Exchange, said that Calgary would be its North American hub and that it would maintain Nexen staffing and capex levels.

In July, Macquarie’s oil and gas analysts described the “strategic fit” of the Nexen acquisition as “overwhelmingly compelling”.

They pointed to a better balance to Cnooc’s upstream portfolio, the bigger scale of its operations, an extension of its reserves life, a cash-cow base from the UK North Sea and the material presence that Cnooc would have at every step in a trans-Pacific integrated LNG chain. The company would also have a springboard into Africa and would gain transferable know-how from developing shale gas and deepwater projects.

The International Energy Agency predicts that in the next 25 years, 90% of the projected increase in global energy demand will come from non-OECD countries — and China will account for 30% of that growth. According to analysts at HSBC, China’s energy consumption rose at a compound annual rate of 6.8% between 2006 and 2010.

Credit Suisse’s Hewitt suspects that China has set a target for 25% “equity-oil”; in other words, that a quarter of its oil imports should be controlled by Chinese entities. It also needs to upgrade its technical knowledge and commercial skills to compete with international oil companies.

“Nexen’s bench-strength in deep-water and shale technology will be a major enhancement for Cnooc as it looks to leverage the domestic opportunities in these areas,” Hewitt added. China has its own vast reserves of shale gas.

Nexen’s share price surged 15% to $26.94 at Friday’s New York close, below Cnooc’s $27.50 offer price.

Cnooc is advised by BMO Capital Markets and Citi; and Nexen’s financial advisers are Goldman Sachs and RBC Capital Markets.

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