Nexen bid of 'net benefit' to Canada: CNOOC executives

Claudia Cattaneo? Jul 23, 2012 ? 7:19 AM ET | Last Updated: Jul 23, 2012 6:16 PM ET

CALGARY ? Chinese oil company CNOOC Ltd. is confident its US$15.1-billion bid for Nexen Inc. provides a ?net benefit? to Canada because the deal helps accelerate resource development and increases job creation, making it aligned with Canadian government goals, the company?s two top executives said Monday.

Li Fanrong, president and CEO of the Beijing-based, state controlled Chinese oil company, and Fang Zhi, president of CNOOC International Ltd., who negotiated the transaction, said in an interview in Calgary their company has operated in Canada since 2005 and understands how to behave in a market-driven economy.

Bobby Yip/Reuters files

CNOOC Executive Director, President and Chief Executive Li Fanrong.

?What gives us the confidence? In any M & A, one must look at the deal certainty, and we have done quite a bit of our homework,? Mr. Fang said. ?But most importantly, this is a commercial transaction that is friendly and given time will prove for itself that it will bring net benefit to Canada. We are very confident of that part of the story.?

Mr. Li said his company moved ahead with the bid because the Canadian government has been welcoming foreign investment to realize Canada?s resource potential.

?The Canadian investment environment is one of the best in the world,? Mr. Li said. ?You have got a very stable political system.?

Facts about Nexen

• Nexen is Canada?s sixth-largest independent oil explorer.
• Nexen produced 207,000 barrels of oil equivalents per day (boe/d) in 2011, including about 45,000 boe/d in the Athabasca oil sands region in the Canadian province of Alberta.
• As of 2011, Nexen had about 2.3 billion barrels of oil equivalent of proved and probable reserves.
• The company started in Western Canada but now operates in the Gulf of Mexico, Colombia, the North Sea, Yemen and offshore West Africa. Headquartered in Calgary, Alberta, and traded on the Toronto Stock Exchange and the New York Stock Exchange, Nexen has about 3,000 employees.

? Thomson Reuters 2012

If successful, the deal to buy Nexen would be China?s biggest foreign corporate takeover and a test of Ottawa?s tolerance of outside interest in its resources.

China?s largest offshore oil and gas explorer is paying US$27.50 for each common share, a premium of 61% to Calgary-based Nexen?s closing price on July 20, according to its statement to the Hong Kong stock exchange Monday. Nexen?s board recommended the deal to its shareholders.

In early trading, shares of the company were up $9.23 or more than 53% to $26.53 on the Toronto Stock Exchange.

Nexen will give CNOOC assets in Canada, the U.K., West Africa and the Gulf of Mexico that produced 207,000 barrels a day in the second quarter, boosting the Chinese company?s output by about 20%. The deal is a second attempt to buy a large North American oil and gas producer after political opposition blocked the acquisition of Unocal Corp. in 2005.

In a conference call with the media, CNOOC CEO Li Fanrong said there have not yet been discussions with the federal government about the takeover.

Industry Canada confirmed Monday it and the federal Competition Bureau will review the deal.? Ottawa can review and block any foreign investments worth more than $330-million if it thinks a deal is not in Canada?s best interests.

?CNOOC has indicated that it will be filing an application for review under the [Investment Canada] Act shortly,? Industry Minister Christian Paradis said in a statement. ?Where an investment is subject to review under the Act, my approval is required prior to implementation. I approve applications where I am satisfied that a proposed investment is likely to be of net benefit to Canada.?

Mr. Li said CNOOC wants to purchase Nexen because of its excellent assets and highest calibre employees.

CNOOC plans to continue and likely expand Nexen?s capital spending plans.

?We are in Canada to invest, to be a good employer, and to continue Nexen?s commitments to the environment and communities,? Mr. Li said.

CNOOC noted that it intends to keep Nexen?s existing management and staff. But Nexen interim CEO Kevin Reinhart said his future with the company is a matter of future discussion.

Mr. Reinhart said the offer provides Nexen shareholders with ?significant and immediate value.? The offer price represents a 61% premium over Friday?s closing price.

For employees, the offer opens new doors and new opportunities, he said.

CNOOC will establish in Calgary one of its international headquarters and, in addition to Nexen?s current operations, run an additional $8-billion of its North American and Central American assets.

Coinciding with the transaction, CNOOC will seek to list its shares on the Toronto Stock Exchange, in addition to existing listings in Hong Kong and New York.

Analysts praised CNOOC?s strategy.

?CNOOC did a nice job in adding oil reserves at less than US$20 a barrel,? said Shi Yan, a Shanghai-based energy analyst at UOB-Kay Hian Ltd. ?It?s really a good time to buy assets while crude prices are low and energy firms shed values in stock markets.?

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%.

?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, oil analyst at brokerage UOB Kay Hian in Shanghai.

The move was quickly followed by another Chinese move on Canadian oil assets, as Sinopec Corp said it would buy 49% of Talisman Energy?s UK unit for US$1.5-billion.

CNOOC will offer to buy Nexen?s prefered shares and the Canadian company?s debt of US$4.3-billion will remain in place, the statment said. Cnooc will pay for the acquisiion using existing cash funds and external financing.

?The acquisition of Nexen will expand the group?s oversea business and resource base in order to deliver long-term sustainable growth,? CNOOC said in the statement. ?Nexen will complement the group?s large offshore production footprint in China.?

The Chinese company is paying 8.84 times earnings before interest and tax for Nexen, compared with the median of 33.06 of 10 comparable deals, according to data compiled by Bloomberg. The Beijing-based company will add 900 million barrels of oil equivalent reserves at US$19.94 per barrel through the deal, according to a document posted to the company?s website.

CNOOC plans to boost output by as much as 2.7% this year to the equivalent of as much as 340 million barrels of oil. CNOOC lost production from its largest offshore oilfield in the first quarter after the site was temporarily shut down.

Nexen has faced numerous challenges over the past few years, most recently the troubled launch of its Long Lake oilsands project in northern Alberta. The project has yet to come close to its design capacity of 72,000 barrels of bitumen per day due to a number of operational glitches.

In January, Nexen announced a major management shakeup, with Marvin Romanow leaving his post as CEO and Gary Nieuwenburg stepping down as the executive vice-president of the company?s Canadian operations.

Reinhart was previously the company?s chief financial officer.

Nexen?s original partner at Long Lake, Opti Canada, filed for court protection from creditors last summer and was later acquired by CNOOC for US$2.1 billion.

The deals in Canada have not yet awakened the political opposition that killed CNOOC?S US$18.5-billion Unocal bid.

Ottawa most noticeably exercised that right in 2010 when it blocked Anglo-Australian miner BHP Billiton?s US$39 billion hostile takeover of Potash Corp, the world?s top fertilzer producer.

Ottawa considers six factors when examining such deals. They include the effect on employment and resource processing in Canada, the degree of participation by Canadians in the Canadian business, the effect of the investment on competition in Canada and the contribution of the investment to Canada?s ability to compete in world markets.

The Chinese company has made several other investments in Canadian companies over the past seven years, including buying stakes in MEG Energy Inc. and a 60% investment in Northern Cross (Yukon) Ltd.

Canada?s oilsands has been a hive of M&A activity as major international oil companies look to get a foothold in the world?s third largest oil reserves.

Below is a list of a few selected oilsands M&A transactions over the past five years:

27-Apr-07 $2.2-billion Statoil?s acquisition of of North American Oil Sands

5-Dec-07 $1.16-billion Husky Energy and BP plc?s exchange 50% int. in Sunrise Oil Sands/Toledo Refinery

6-Feb-08 $105-million Husky acquires Devon Energy?s heavy oil properties near Pelican Lake

28-Apr-08 $541-million Total acquires Synenco Energy

29-May-08 $105-million Ivanhoe Energy Inc.?s acquisition of Talisman Energy?s Leases 10, 50 and 6

23-Jun-08 $500-million Occidental?s acq. of 15% interest in Joslyn project from Enerplus

17-Dec-08 $735-million Nexen?s acquires 15% interest in JV assets from OPTI

1-Sep-09 $1.9-billion PetroChina?s acquries 60% interest in JV assets from Athabasca

2-Nov-09 $250-million Imperial Oil and Exxon Mobile?s acquires 50% interest in Lease 421 from UTS Energy

11-Mar-10 $650-million Devon Energy Corp. acquires 50% interest in Kirby leases from BP Canada

15-Mar-10 $1.250-billion Canada acquires 75% Interest in Terre de Grace project from Value Creation Inc. P $0.62

7-Jul-10 $1.5-billion Total E&P Canada Ltd acq. all outstanding shares of UTS Energy Corporation

13-Sep-10 $144-million Athabasca Oil Sands acq. 100% of Excelsior Energy Limited

10-Oct-10 $405-million Canadian Natural Resources acq. Enerplus? Kirby Oil Sands lands

22-Nov-10 $2.3-billion Statoil sells 40% interest in Oil Sands to PTT Exploration and Production

3-Jan-12 $680-million Athabasca Oil Sands (40% WI) Puts MacKay property to PetroChina (60% WI)

9-Jan-12 $460-million SilverBirch sells 50% Interest in Frontier and Equinox to Teck Resources

31-Jan-12 $225-million Petrobank Sells 100% interest in May River to Grizzly Oil Sands

23-Jul-12 $15.1-billion CNOOC buys Nexen

Source: CIBC

With files from Reuters and The Canadian Press

Source: http://business.financialpost.com/2012/07/23/chinas-cnooc-to-buy-nexen-for-15-1-billion/

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