(By Mani) The $15.1 billion deal by CNOOC (China National Offshore Oil Corp.) Limited (NYSE:CEO) to acquire Canadian oil & gas producer Nexen, Inc. (NYSE:NXY) (TSX:NXY) ends Nexen's often troubled story and gives some excellent energy assets to the Chinese firm.
Calgary-based Nexen, which fired its CEO in January, has major oil and gas positions in three of the world's most significant conventional basins — the UK North Sea, Offshore West Africa and the deep-water Gulf of Mexico. It is the second largest oil producer in the UK North Sea.
The deal, if approved, could the largest cross-border acquisition by a Chinese company on record, surpassing Aluminum Corp of China's (alongside Alcoa Inc) $14.3 billion acquisition of a 12 percent stake in Rio Tinto plc in 2008, according to data from Dealogic
The deal also marks the biggest takeover of a Canadian company by a National Oil Company in Canadian history, and naturally the question/concern that is undoubtedly at the forefront of investors' minds is, "Will the regulators allow such a transaction?"
In the past, the Canadian government has blocked some bigger overseas takeover attempts in the country. In 2010, Canadian government blocked mining firm BHP Billiton's (NYSE:BHP) $39 billion attempt to make a hostile takeover of fertilizer firm Potash Corp. (NYSE:POT) (TSX:POT). Even, CNOOC had faced a political backlash in 2005 resulting in a failure of its attempt to buy US-based Unocal.
Skeptics may feel that if China got hold of major assets in North America, then the nation's corporate sector may face excessive interference from Beijing. However, the main criterium for approval of any deal is whether such a deal presents a "net benefit" to Canada.
"While NXY is one of the larger Canadian oil and gas companies, only ~28% of the company's total production and only ~11% of total cash flow are actually generated in Canada, with the rest, largely, coming out of the UK and Nigeria. Given NXY's strong international diversity, we believe it would be difficult for regulators to oppose the transaction on this front," CIBC analyst Andrew Potter wrote in a note to clients.
From a net benefits perspective, CNOOC puts forward a reasonably compelling argument by maintaining Nexen's staff and making Calgary the head office for CNOOC North America, as well as listing CNOOC on the TSX.
In addition, CNOOC could accelerate Nexen's LNG potential in West Coast Canada, well beyond what the company could have or would have done on its own. Such acceleration would infer higher investment in Canada, in addition to increased royalties and taxes.
"Overall, we believe the CNOOC bid for NXY faces modestly higher-than-average closing risk due to lack of precedent, but on paper, the pros or net benefit should be more than enough to see regulatory approval," Potter added.
CNOOC said the deal would boost its oil reserves by 30 percent as the acquisition would boost its global presence with a high quality asset base in many of the world's most significant producing regions – including Western Canada, the U.K. North Sea, the Gulf of Mexico and offshore Nigeria – focused on conventional oil and gas, oil sands and shale gas.
In terms of rationale, CNOOC is one of the most sensible buyers for Nexen. CNOOC previously acquired Nexen's erstwhile partner Opti Canada Ltd., and its share in the Long Lake project, with that deal closing in November 2011.
The Opti Canada transaction supplied CNOOC with a high level of comfort in the Long Lake oil sands project, which is a big component of Nexen. CNOOC also has an existing JV with Nexen in the Gulf of Mexico which the companies entered into on November 30, 2011.
Additionally, CNOOC has expressed a strong desire to increase its exposure to producing assets in places such as Africa, where Nexen currently holds a 20 percent stake in the Usan project.
The above developments imply that CNOOC had made a strong homework on the deal post Unocal failure. The Chinese giant initially partnered with Nexen, got a feel of its assets, regulatory environment, and then launched an offer that is too good to reject, at least in paper.
CNOOC would pay US$27.50 per Nexen share in an all-cash deal, representing a 61 percent premium to Nexen's Friday's closing price and 66 percent to 20-day moving average.
Meanwhile, it would the third largest Chinese acquisition on record and the largest since China Unicom Ltd acquired China Netcom Group Corp Ltd for $22.8 billion in 2008. The deal, upon approval, is the fifth largest foreign takeover of a Canadian company on record and the largest since Rio Tinto plc acquired Alcan Inc for $43.0 billion in 2007, according to Dealogic.