In my article “Deal or No Deal” (Energy, November, 2011), I highlighted my expectation of increased bid activity from National Oil Companies (NOC’s) given their significant sovereign wealth fire-power and the perception that in current volatile markets, there was value to be exploited.
This was emphatically underscored in July with a knockout bid from the China National Offshore Oil Corporation (CNOOC) for Nexen of Canada, valuing the business at $15.1billion (£9.7billion).
CNOOC’s last attempt at a major acquisition in North America was its 2005 hostile approach to Unocal. The bid ran into major political difficulties, with much angst about national security.
Although CNOOC’s offer of $18billion was higher than Chevron’s original bid, it was the domestic major which eventually took the prize with the Chinese NOC effectively forced to withdraw.
Perhaps unsurprisingly, the Nexen bid has ruffled a few feathers in pre-election Washington given that Nexen holds significant subsidiary assets in the Gulf of Mexico.
Charles Schumer, a prominent Democrat in the US Senate, has urged the Committee on Foreign Investment in the US (CFIUS) to intervene.
CNOOC Chairman Wang Yilin has tabled a very canny bid however, indicating that if successful, the NOC would locate its headquarters for the Americas in Calgary, that it will seek a listing for its shares on the Toronto Exchange, and that capital investment will increase from current levels – including research on the Alberta tar sands.
In addition, the offer represents a 60% premium to Nexen’s pre-bid share price, all of which is designed to appeal to regulators, and to satisfy Canada’s generalist “best interests” provisions.
In addition to satisfying law makers in Canada and the US, the bid will also have to gain approval in the UK where Nexen is the second-largest producer in the North Sea with production of oil and gas of around 114,000 barrels of oil equivalent per day.
Indeed, just prior to the bid, the Press & Journal reported that production from the Buzzard field, where Nexen is operator, rose by over 70% compared to the same quarter last year.
CNOOC has only nine years’ worth of reserves based on its current rate of production; relatively low among major oil companies worldwide.
It is hungry for reserves and has had to look overseas. Various deals over the last decade have brought CNOOC’s foreign upstream assets up to 24% by value.
If the Nexen deal succeeds, international assets will increase to 38% of the company’s upstream commercial value – higher than any other Chinese NOC so far.
Nexen’s share price has underperformed the Toronto Energy Index by around a third over the past five years, held back by a fairly large debt pile (C$3billion) which has led top concerns that this will curtail its capex abilities.
As such, the huge premium on this bid will be welcomed by shareholders.
At an operational level it is unlikely that there are sufficient synergies to warrant this premium, however, and there can be little doubt that this bid is as much about strategy as it is about production and reserves.
China has huge reserves of unconventional hydrocarbons and is understandably keen to develop the expertise and technology required to extract and exploit these assets.
CNOOC has undertaken various joint venture projects of this type already, but the proposed acquisition of Nexen would really begin to close the knowledge gap, given the work done by the Canadians on oil sands, ultra deep-water, and other unconventional techniques.
A further strategic element to this proposed acquisition is that it would give the Chinese state offshore oil company a line in to the setting of the Brent Crude price, as postulated on the Reuters news wire just after news of the bid broke.
Given Nexen’s significant interest in the North Sea, CNOOC would have access to the Forties Grade of North Sea oil which is a component part of the benchmark “Dated Brent” spot price used for settlement of futures contracts.
This would give CNOOC a very valuable read on the supply position overall on North Sea assets.
Overall the bid appears priced to succeed. Nexen’s board has approved it, and shareholders have had a windfall.
CNOOC is certainly paying up, but strategically one can perhaps understand why. There is a saying in investment that “markets climb a wall of worry”. In the Nexen deal the only wall left to climb is that of political and regulatory ascent, which may yet prove to be a great one.
David Barclay, divisional director at Brewin Dolphin
Disclaimer
The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.