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CNOOC 'Fully Prepared' for U.S. Review of Unocal Offer; Analysts Expect Chevron to Prevail

Acknowledging concerns about China's global economic ambitions, the CEO of China National Offshore Oil Corp. (CNOOC) said Friday that the company was "fully prepared" to participate in a U.S. government security review of the unsolicited offer to buy Unocal Corp. for $18.5 billion cash. CEO Fu Chengyu also said CNOOC would discuss selling some Unocal pipeline and storage assets, and consider putting some assets not involved in exploration and production "under American management."

CNOOC's bid to buy Unocal trumped a $16.5 billion cash-and-stock offer by Chevron Corp., whose deal is pending with U.S. regulatory authorities. CNOOC also would have to pay a $500 million breakup fee to Chevron and would assume $1.6 billion in Unocal debt.

Fu attempted to assuage U.S. political concerns by calling CNOOC's offer "friendly," and he said he hopes it will lead to a "consensual transaction." The proposed transaction is considered the largest foreign acquisition attempted by a Chinese company, and it would be the first time that companies in China and the United States were engaged in a takeover battle. CNOOC is 70%-owned by the Chinese government.

"Substantially all of the oil and gas produced by Unocal in the U.S. will continue to be sold in the U.S.," Fu said. "The development of properties in the Gulf of Mexico will provide further supplies of oil and gas for American markets."

About 70% of Unocal's assets are located in Asia, and a combined CNOOC and Unocal would have 85% of its reserves in Asia. Unocal has gas and oil fields in Thailand, Indonesia and Myanmar, which complements CNOOC's offshore Chinese, Indonesian and Australian holdings. Unocal also owns a 10% stake in an Azerbaijan field and pipeline operated by BP plc, which will transport oil to the Mediterranean.

Fu said Thursday in a statement that the transaction makes sense for his shareholders because it would strengthen the company's portfolio and be accretive to earnings. CNOOC, unlike Chevron, also would retain "substantially all" of the El Segundo, CA-based company's 6,500 employees, he said.

"Our all-cash offer is clearly superior for Unocal shareholders," Fu said in a conference call. "Second, it is good for America. We will protect Unocal's U.S. jobs." Fu downplayed the role of Chinese national interests in the takeover bid, and said the offer was made on the merit of commercial considerations. "This transaction is purely a commercial transaction. We are confident that the U.S. government will support this project."

Fu, who earned a master's degree in petroleum engineering from the University of Southern California, and who once worked for the Phillips Petroleum Co., said that if people "have a better understanding" of CNOOC, "I think there will be less concern both politically and maybe economically."

Unocal said it would evaluate the proposal because of its "fiduciary duties and its obligations under the Chevron agreement." Unocal's statement noted that the board's recommendation that shareholders approve the acquisition by Chevron "remains in effect."

Chevron, headquartered in San Ramon, CA, stated that its original agreement to buy Unocal "combines compelling value, regulatory certainty and accelerated timing, providing a superior transaction for Unocal stockholders." However, Chevron late Thursday granted Unocal a waiver allowing it to negotiate directly with CNOOC. Chevron did not indicate whether it would increase its bid for Unocal, but already, Unocal's share price has risen above Chevron's original offer. On Friday, Unocal's stock was trading around $65/share.

The suggested bid by CNOOC had already stirred the political pot in Washington, DC. On Wednesday, Energy Secretary Samuel Bodman said that a bid would be reviewed by the Committee for Foreign Investment in the United States, an interagency panel chaired by Treasury Secretary John Snow. The committee screens these types of transactions for national security concerns. And earlier this month, California Reps. Richard Pombo and Duncan Hunter asked the Bush administration to review and possibly block a CNOOC bid.

However, there are questions about free trade. ExxonMobil CEO Lee Raymond said last week that an attempt to block CNOOC's bid would be a "big mistake." He told reporters at the Reuters Summit, "You have to have free trade. If you start to put inefficiencies in the system, all of us eventually pay for that."

Meanwhile, many financial analysts appear to believe that Chevron will prevail.

Howard Weil Inc. analyst Gene Gillespie said in a note to clients, "I don't think this is attractive to the Unocal shareholders," because a portion of the Chevron acquisition would be tax-free to Unocal's investors. Oppenheimer & Co.'s senior energy analyst Fadel Gheit also noted that Unocal shareholders might turn down the offer.

Referring to CNOOC, Gheit said, "They should at least have upped it to $72" a share...This is a waste of everyone's time." However, he said he would not be surprised if Chevron increased its offer. "I think Chevron is committed and interested in Unocal, and it's not going to let the deal collapse."

Analyst Bernard J Picchi of Foresight Research Solutions LLC, wrote in a note that he doubted that "either CNOOC or Beijing is intimidated by the prospect of U.S. regulatory, Congressional, or White House scrutiny of its offer for Unocal. In fact, the Chinese probably welcome an intense U.S. government review of its Unocal bid as a kind of clarifying exercise that will set firm policy regarding Chinese direct investment in the U.S."

Still, Picchi expects "Chevron will prevail, but...it will eventually sweeten its offer to match CNOOC's $67/share cash bid. It is possible, of course, that Chevron's share price could rise from $58 to $66, which would level the playing field between the two bids."

On Thursday, Moody's Investors Services placed the "A2" rating of CNOOC and the long-term rating of its subsidiaries on review for a possible downgrade. Moody's actions "reflect the cash component of the transaction and the significant debt that will be raised to fund the acquisition." Moody's also changed the status of its review of the "Baa2" rating of Unocal to "direction uncertain" from review for an upgrade, in response to the CNOOC bid.

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