China's CNOOC Ltd. plans to buy Canada's Nexen Inc. for US$27.50/share (about $15.1 billion) in cash in a deal to expand CNOOC's overseas businesses and resource base and increase the capital available for development of Nexen assets, the companies said Monday.
"Nexen will complement CNOOC Ltd.'s large offshore production footprint in China and extends CNOOC Ltd.'s global presence with a high-quality asset base in many of the world's most significant producing regions -- including Western Canada, the UK North Sea, the Gulf of Mexico and offshore Nigeria -- focused on conventional oil and gas, oilsands and shale gas," CNOOC said. "In addition, Nexen management's current mandate will be expanded to include all of CNOOC Ltd.'s North American and Caribbean assets."
The price represents a premium of 61% to the closing price of Nexen common shares on July 20 and a premium of 66% to Nexen's 20 trading-day volume-weighted average share price. Total cash consideration of about US$15.1 billion will be paid for Nexen's common and preferred shares, and Nexen's current debt of about US$4.3 billion will remain outstanding. The deal is expected to close in the fourth quarter of 2012. The transaction will be funded by CNOOC's existing cash resources and external financing.
The deal will be the third test in four years of Canadian tolerance for foreign takeovers of national economic pillars. Nexen is Canada's seventh-largest oil and natural gas producer.
At about noon Monday, Nexen shares were trading up nearly 52% at $25.86, after blowing past a previous 52-week high of $24.77, reflecting the market's faith in the deal.
"The acquisition reflects our strong belief in Nexen's rich and diverse portfolio of assets and world-class management and employees," said CNOOC Chairman Wang Yilin. "This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada, and to acquire a leading international platform in the process."
Nexen had average production of 207,000 boe/d (after royalties) in the second quarter. Nexen had 900 million boe of proved reserves and 1.12 billion boe of probable reserves as of Dec. 31. In addition, at the end of last year Nexen had "best estimate contingent resources" of 5.6 billion boe, in accordance with Canadian accounting standards, predominantly in the Canadian oilsands.
"This transaction delivers significant and immediate value to Nexen shareholders. The Nexen Board is unanimous in its view that the transaction is in the best interest of Nexen and recommends shareholders vote in favor of the transaction," said Nexen Chairman Barry Jackson.
Nexen is focused on: oilsands and shale gas in Western Canada and conventional exploration and development primarily in the North Sea, offshore West Africa and in the deepwater Gulf of Mexico.
CNOOC is China's largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world. It has four major producing areas in offshore China as well as oil and gas assets in Asia, Africa, North America, South America and Oceania. As of Dec. 31, CNOOC owned net proved reserves of 3.19 billion boe, and its net production averaged 909,000 boe/d.
The deal immediately raised economic and political questions. As in the United States -- where economic and political resistance, including a bipartisan coalition in Congress, blocked an $18.5 billion bid by CNOOC for Unocal Corp. -- Canada harbors widespread doubts about turning over key elements of industry to foreign industrial empires.
The skeptics are potent. In late 2010 the Canadian government sided with vehement provincial opposition to reject a $38.6 billion attempt by Australian mining giant BHP Billiton Ltd. to take over Potash Corp. of Saskatchewan Inc., a global fertilizer producer based in its namesake province. The scheme jeopardized a "strategic resource" for Canada, said the government in Ottawa at the time.
Two years earlier, in 2008, federal authorities also intervened to stop a proposed takeover of the aerospace division of Vancouver-based MacDonald Dettwiler & Associates Ltd. by a U.S. heavyweight in the field, Alliant Techsystems Inc. The explanation in Ottawa was that the target of the deal represented a critical ingredient in Canadian know-how and technology development.
The government in Ottawa retains power to review and stop large foreign takeovers under decades-old legislation called the Investment Canada Act. The law authorizes a specialized agency and the federal cabinet to demand proof that proposed deals represent significant net benefits to Canada.
The deal is bound to be viewed critically from a perspective of guarding national economic assets that is deeply rooted in the Canadian business and political establishment. The perspective showed most clearly about two years ago, in a public statement by four Canadian household names in industry, government and finance: Calgary corporate pillar Richard Haskayne, former Alberta premier Peter Lougheed, insurance baron Dominic D'Alessandro and Montreal money manager Steve Jarislowsky.
"One proven approach is to set a ceiling on foreign ownership," Haskayne said as the group's spokesman. "We have examples like the 20% limit on foreign ownership of Canadian banks. If we didn't have that in the [federal] Bank Act, the Canadian banks wouldn't be here today. Think of where we'd be now if they had been taken over by American banks."
The thinking behind the protective attitude is straightforward. "As Canadians we should say to international business that if you want to take on the risks of acquiring assets and building operations, come on in, but if you want to come in by buying companies, that's different."
Wells Fargo Securities analyst David Tameron wrote Monday that "the reluctance from U.S. regulators to allow a Chines NOC [national oil company] to purchase a U.S. independent has made the Canadian E&Ps relatively more attractive to investors, in our view. That said, we think U.S. regulators would likely approve any corporate acquisitions for most entities outside of Chinese control."
Noting ongoing growth and economic development in China, Tameron wrote that the country's energy use will continue to expand. "It is hard to imagine the Chinese oil companies are done [acquiring] here. Following this deal, we continue to see an appetite from other Asian and European oil companies to gain exposure to the North American Energy markets."
In Canada, CNOOC has a stake in MEG Energy Inc., OPTI Canada Inc. (Nexen's partner in Long Lake steam-assisted gravity drainage production facilities and upgrader), and a 60% interest in Northern Cross (Yukon) Ltd.
Nexen assets in the United Kingdom, United States and other countries will continue to be managed from its regional offices, and CNOOC will retain the current management and employees in those operations as well as continue to work with local suppliers.
CNOOC said it would:
CNOOC said it is committed to Nexen's assets in the United Kingdom, including investment plans for maintenance and development of all producing, development and exploration assets with opportunities for continued cooperation with U.K.-based suppliers.
In the United States, investments in exploration and development in the Gulf of Mexico will be maintained.
In Nigeria, CNOOC will continue Nexen's partnership in the Usan project and maintain its active development, appraisal and exploration drilling campaign on Nexen's Nigerian acreage.
The deal includes a non-solicitation covenant that entitles Nexen to accept a superior proposal and a right for CNOOC to match any superior proposal. CNOOC could be entitled to a breakup fee of US$425 million if the deal doesn't close. Closing is subject to customary conditions, including court approval of the arrangement; approval of two-thirds of the votes cast by holders of common shares; and government and regulatory approvals in Canada, the United States, China and possibly the European Union.
Nexen started out as an Alberta arm of global oil, as a subsidiary of Occidental Petroleum. Majority ownership was sold to Canadians in the 1970s and 1980s, in response to strong government and investor interest in expanding home-grown control of the energy industry.
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