Cnooc in $3.1 billion Argentine joint venture

Cnooc makes its largest overseas investment to date, shelling out $3.1 billion for a 50% stake in Argentine oil and gas company Bridas Corporation.

Hong Kong-listed Cnooc has partnered with Bridas Energy Holdings (BEH) by investing $3.1 billion in a subsidiary of the Argentine oil producer.

Cnooc is buying a 50% stake in Bridas Corporation, which has oil and gas exploration and production activities in Argentina, Bolivia and Chile. Bridas also owns 40% in Pan American Energy, the second-largest Argentine exploration and production company, which is jointly owned by Bridas and British oil and gas firm BP. The deal will add 318 million barrels of oil equivalent of proven reserves to Cnooc's 2.15 billion barrel reserve base as of December 2008.

Cnooc is 64.4%-owned by Chinese state-owned enterprise China National Offshore Oil Corporation. This is the largest deal struck by Hong Kong-listed Cnooc, surpassing the $2.27 billion it paid in 2006 for a 45% interest in Offshore Oil-Mining Licence 130 in Nigeria.

"This is a significant transaction for Cnooc that immediately adds high-quality reserves and production, and more importantly, opens up a new geography for strategic growth," said Yash Kaman, head of Asia oil & gas investment banking at J.P. Morgan. 

J.P. Morgan is advising Cnooc on the Bridas investment, and yesterday it emerged that private equity firm Hopu Investment Management, founded and run by former Goldman Sachs China partner Fang Fenglei, is advising BEH. This is the first instance of Hopu providing M&A advice and suggests the firm may try to model itself on Blackstone, which has an advisory arm as well as an investment arm.

Discussions about a partnership began about six months ago, said a source close to the transaction. Cnooc and BEH will have equal representation on the board of Bridas and will jointly manage the company. Neither party has an option to increase its stake or a casting vote, said the source, though the joint venture agreement does detail mechanisms for dispute resolution. "This is truly a partnership of equals," said the source. "Bridas wanted to monetise part of its investment and Cnooc wanted a strong local partner to grow its presence in Latin America."

The deal is subject to regulatory approvals and is expected to close in the first half of this year.

"Latin American economies have responded well to the recent crisis with faster recovery expected in the region; country risk levels have decreased," said Cnooc in a presentation posted on its website sharing details of the Bridas investment. What the presentation did not say explicitly was that Chinese capital is still being welcomed in Latin America.

"Cnooc's strong financial flexibility provides a cushion for the investment risks related to the [acquisition]," Renee Lam, a senior Moody's analyst, said in a note issued by the rating agency yesterday. The note confirmed that Cnooc's A1 rating is not immediately affected by the deal. However Lam went on to comment that the Britas investment is "essentially Cnooc's first entry into the Latin American upstream business [and] poses higher geopolitical risk than the company's existing operations". Moody's estimates that almost three-quarters of Cnooc's reserve base is accounted for by reserves in its home market in China, which will help mitigate operational risks with respect to the $3.1 billion investment.

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