CNOOC to buy Nexen for $15.1 billion in China's largest foreign deal

By Lee Chyen Yee and Jeffrey Jones

HONG KONG/CALGARY | Mon Jul 23, 2012 2:05pm EDT

HONG KONG/CALGARY (Reuters) - State-controlled CNOOC Ltd launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen Inc for $15.1 billion, forcing Ottawa to decide whether national 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 by offering a hefty 61 percent premium to Nexen's Friday stock price, pledging to retain all employees and promising to make Canada home base for its Western Hemisphere operations.

CNOOC is offering $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 move is the most ambitious foray by resource-hungry China into North American energy since a 2005 attempt to buy U.S.-based Unocal for $18.5 billion was thwarted by a political backlash there.

"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."

CNOOC has only nine years worth of reserves based on its current production -- one of the lowest ratios among major oil companies worldwide -- and 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 move on Canadian-owned oil assets, as Sinopec Corp said it would buy 49 percent of Talisman Energy's British unit for $1.5 billion.

CNOOC already has partnerships with Nexen, the onetime unit of Occidental Petroleum Corp which operates in many of the world's most significant producing regions.

Nexen, which recently underwent a management shake-up, has been seen for years by investment bankers as a potential target.

Analysts had been referring to the company as a turnaround story since Kevin Reinhart took over as interim CEO early this year. He was showing success in improving the reliability of such projects as the huge Buzzard oil field in the North Sea after years of missed production targets.

"It's a good deal for shareholders because I think the stock had historically been trading at a very big discount to its net asset value because of management's less than stellar execution on the operations," said Norman MacDonald, vice president and portfolio manager at Invesco Trimark.

Shares of Nexen, whose board unanimously approved the deal, surged C$9.23, or 53 percent, to C$26.52 in Toronto on Monday.

CNOOC made its first tentative Canadian investment in 2005, paying C$122 million ($120.8 million) for a 16.7 percent share of the then-private oil sand developer MEG Energy Corp.

It completed a C$2.1 billion acquisition of Opti Canada Ltd in November, giving the Chinese company its second stake in a Canadian oil sands company and giving it a share in Nexen's Long Lake oil sands development.

FOREIGN INVESTMENTS

The deals in Canada have not yet stirred the level of political opposition that killed CNOOC's $18.5 billion Unocal bid.

But Canada can review and block any foreign investments worth more than C$330 million if it thinks a deal is not in Canada's best interests. It most noticeably exercised that right in 2010 when it blocked Anglo-Australian miner BHP Billiton's $39 billion hostile takeover of Potash Corp, the world's top fertilizer producer.

Canada's industry minister confirmed on Monday that he would conduct a review, as required by law, focusing on such aspects as the effect of the deal on economic activity in Canada, the degree of participation by Canadians in the business and the impact on competition in the country.

That said, analysts pointed out that the lion's share of Nexen's assets are outside Canada, which may help CNOOC pass muster with Investment Canada.

Twenty-eight percent of Nexen's production and 11 percent of its cash flow are derived from Canadian operations, CIBC World Markets analyst Andrew Potter said.

Analyst Shi said he price for the deal seemed reasonable for CNOOC.

"Assets in Canada are generally about more than 20 U.S. dollars per barrel. The cost in the deal is less than 20 dollars per barrel," Shi said.

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.

According to Thomson Reuters data, the takeover would be bigger than any foreign deal completed to date by a Chinese company.

Buying Nexen also would make CNOOC the operator of Buzzard, the largest oil field in the UK and the biggest contributor to Forties Blend crude.

Forties is the largest of the four North Sea crude oils that form the Brent oil benchmark, and the crude that usually sets the value of dated Brent, the benchmark for pricing more than half of the world's oil.

BMO Capital Markets and Citigroup Global Markets Inc advised CNOOC, while Nexen was advised by Goldman Sachs and RBC Capital Markets.

CNOOC said Nexen's debts of about $4.3 billion would remain outstanding and it hoped to complete the deal by the fourth quarter of 2012.

It also said it would seek a listing for CNOOC shares on the Toronto Stock Exchange and would make Calgary its North American headquarters.

($1 = 1.01 Canadian)

(Additional reporting by Fayen Wong, Aizhu Chen, Xu Wan and Charlie Zhu in China bureaus and Claire Sibonney and Euan Rocha in Toronto.; Writing by Jeffrey Jones, Neil Fullick and Andrew Callus; Editing by David Holmes and Frank McGurty)

Source: http://feedproxy.google.com/~r/reuters/topNews/~3/WnRBi8fdXn4/us-cnooc-nexen-idUSBRE86M0CF20120723

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