CNOOC in $15B Int'l Takeover Deal

Chinese energy giant CNOOC Ltd. (CEO - Analyst Report) has cut a deal to purchase Canadian energy producer Nexen Inc. (NXY) for approximately $15.1 billion in cash. The deal, the country’s biggest foreign takeover so far, reflects the international land grab trend among the Chinese energy companies.

Deal Details

Per the agreement, CNOOC will buy all the outstanding common shares of Nexen at $27.50 per share, representing a premium of 61% to its closing price on the New York Stock Exchange on July 20. The deal, which is expected to be wrapped up by this year-end, requires approval by two-thirds of Nexen’s shareholders as well as approvals from regulators, including those in the U.S.

China's third-largest oil company, CNOOC, expects to fund the acquisition with its existing cash resources and outside financing. It also added that Nexen's debts of about $4.3 billion would remain outstanding.

Upon the successful completion of the deal, CNOOC will list its shares on the Toronto Stock Exchange. It will also retain Nexen’s existing employees, and establish Calgary as its North and Central American headquarters. CNOOC also added that Nexen can terminate the deal and consider a better proposal, but in doing so, it will have to pay CNOOC $425 million as a breakup fee.

Buyer Benefits

CNOOC’s current production gives it only nine years worth of reserves that represents one of the lowest reserves among key oil companies in the world. The upcoming deal would raise CNOOC’s proven reserves by 30% and will help it to vastly expand its holdings in Canada, where it has already spent about $2.8 billion since 2005. Moreover, buying Nexen would make CNOOC the operator of the largest oil field in the U.K. and the biggest contributor to Forties Blend crude − Buzzard.

China being the world's second- largest economy has a huge energy requirement. The acquisition of Nexen is in sync with the present strategy of CNOOC and other Chinese biggies to make a deeper international foray in order to meet domestic demand. Since the last two years, CNOOC has been bidding billions of dollars in overseas properties to increase its yield. The latest deal marks a major step in the company’s goal to boost its output level by approximately 2.7% this year.

Strength of the Acquiree

Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, and has its biggest reserves in the Canadian oil sands. Apart from oil sands, Nexen remains dynamic in natural gas exploration in shale rock formations. It owns approximately 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia.

During the second quarter, Nexen’s production before royalties averaged 213 thousand barrels of oil equivalent per day/MBOE/d (207 MBOE/d net of royalties). Production before royalties increased 4.4% year over year, and on a net-of-royalty basis, it grew 15%. The company had 900 million barrels of oil equivalent (MMBOE) of proved reserves and 1,122 MMBOE of probable reserves as of December 31, 2011.

Other Foreign Moves

Last year, CNOOC completed the C$2.1 billion acquisition of OPTI Canada Ltd and achieved stake in a Canadian oil sands company and a share in Long Lake project. Back in 2005, the company made its first Canadian investment in which it paid C$122 million ($120.8 million) for a 16.7% stake of the private oil sand developer MEG Energy Corp.

However, the Chinese energy companies have moved more carefully after CNOOC’s attempt to acquire U.S.-based exploration and production company Unocal for $18.5 billion was disappointed by a political backlash seven years back. The deal was rejected by U.S. lawmakers on fears of disturbing national security.

According to the International Energy Agency, CNOOC and other major state-owned Chinese energy companies made less than $2 billion worth of total acquisitions between 2002 and 2003. Notably, it jumped to nearly $48 billion in 2009 and 2010.

Rank & Recommendation

We maintain our long-term Neutral recommendation on CNOOC. Also, the company currently retains a Zacks #3 Rank (short-term Hold rating).