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Nexen wins sweet premium in sale to Cnooc

by Paul Whitfield  |  Published July 23, 2012 at 3:54 PM
Chinese energy companies announced two separate billion-dollar-plus deals with Canadian oil producers on Monday, July 23, including the largest-ever Chinese acquisition of a foreign company after Cnooc Ltd. agreed to pay $19.4 billion for Calgary oil and gas producer Nexen Inc.

State-owned Cnooc will pay $27.50 per share for its partner in Canada's Long Lake oil sands project, more than a 60% premium to Nexen's closing price on Friday. The offer values the NYSE- and Toronto-listed target's equity at about $15.1 billion. Nexen has roughly $4.3 billion of debt.

"It is a fantastic deal for Nexen," said Andrew Potter, a Calgary, Alberta-based analyst at CIBC World Markets Inc.

Cnooc is paying about 8.8 times Nexen's 2011 Ebitda. The transaction values Nexen's oil at about $17.29 per barrel based on its enterprise value and its proven reserves of 1,122 million barrels of oil equivalent at the end of December 2011.

"If you compare it with other West Canadian oil producers the [per barrel price] looks a bit light, but not all barrels are equal and Nexen's oil comes from all over the place," said a second Calgary-based analyst who asked not to be named. "I think it is a good deal for Nexen, given the current market, and Cnooc, whose cost of financing is so low almost any deal is accretive."

Calgary-based Nexen owns oil sands and shale gas assets in Western Canada and offshore oil assets in the North Sea, West Africa and the Gulf of Mexico. It produced an average of 207 million barrels of oil equivalent per day in the second quarter of 2012.

"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," said Cnooc chairman Wang Yillin in a statement.

Cnooc has worked with Nexen since 2011 when it paid $2.1 billion for the bankrupt Opti Canada Inc., which was Nexen's partner in its Long Lake oil sands project located in Northern Alberta. The two companies also operate a Gulf of Mexico JV in which Cnooc has a 20% stake.

Nexen has been seen as a potential target for some time as its shares lagged its rivals, principally because of problems at the Long Lake JV. Speculation that it could be taken out gained momentum earlier this year after the January departure of CEO Marvin Romanow and executive VP of Canada Gary Nieuwenburg, the two men most closely associated with Long Lake project. Romanow was replaced by Kevin J. Reinhart, who was CFO at the time and whose position as CEO never shed its interim tag.

In the second of the deals announced on Monday, Calgary-based Talisman Energy Inc. said that it had agreed to sell a 49% stake in its U.K. North Sea operation, Talisman Energy (UK) Ltd., to China Petroleum & Chemical Corp. Ltd., or Sinopec, for $1.5 billion.

"This brings our total divestment proceeds to approximately $2.5 billion so far this year," said Talisman's president and CEO John A. Manzoni in a statement. "We plan to utilize approximately $500 million of the proceeds from this sale to repurchase shares."

The twin deals end something of a slump in China's foreign energy asset acquisitions, which had dipped to under $5 billion in the first half of this year after peaking at more than $32 billion in 2010. The drop-off in deals had been blamed on a combination of uncertain markets, the pending change of leadership in Beijing and the need among China's biggest energy spenders to pause to digest businesses and technology.

Cnooc's acquisition requires approval from Canadian, U.S. and Chinese authorities. Cnooc will be primed to avoid the defeat it suffered in 2005, when it abandoned a $18.5 billion bid for Unocal Corp. amid strong political opposition to the deal.

The Cnooc-Nexen deal carries a $425 million breakup fee.

An acquisition of Nexen would be far and away the biggest foreign company takeover by a Chinese company. It would also rank as China's biggest single foreign acquisition of any sort, topping Aluminum Corp. of China Ltd.'s $14 billion deal for a 9% stake in Rio Tinto Group.

Chinese companies have often shied away from outright takeovers because of fear that the combination of China's own prohibitive inward foreign investment rules and their state-owned status would lead to harsh treatment by regulators.

On the Nexen deal, regulatory scrutiny is likely to be fiercest in Canada, where the bulk of Nexen's assets are located. Ottawa requires that foreign investors prove that a deal will provide a "net benefit" to the Canadian economy. Cnooc on Monday rolled off a list of initiatives aimed at soothing potential concerns, including the nomination of Calgary as the head of its North and Central American operations, an accelerated investment schedule and the intention to list Cnooc shares on the Toronto Stock Exchange. Cnooc also said it would retain Nexen's management and place its North American and Caribbean assets under their control once the deal closes.

Completion of the deal is subject to the support of two-thirds of the votes cast by Nexen shareholders. Cnooc has agreed to pay Nexen $425 million if Chinese regulators block the deal. Cnooc will receive the same from Nexen if its directors withdraw their recommendation for the deal.

Nexen said last week that Ebitda for the second quarter had risen 6% to $707 million compared to the same period a year earlier. Second-quarter profit fell 57% to C$109 million ($107 million) after it booked costs associated with an unsuccessful well in the Gulf of Mexico.

Shares in Nexen traded Monday at $25.80, up $8.74 or 51.2% on their Friday closed of $17.06. That left the stock at a 6% discount to Cnooc's offer price but up 4% over the past year. The shares remain down 24% since five years ago.

Cnooc is taking financial advice from BMO Capital Markets Corp. and a Citigroup Global Markets Inc. team that includes Peter Tague, Martin Lovegrove, Jason Johnson, Colin Banfield, Nathan Eldridge and Kasey Fukada.

Cnooc is taking legal advice from Stikeman Elliott LLP's William Braithwaite, John Ciardullo, Mike Devereux, Christos Gazeas, Warren Ng, J.R. Laffin and Chris Nixon, and Davis Polk & Wardwell LLP's George R. Bason Jr., Howard Zhang, Leonard Kreynin, Kirtee Kapoor and Ronan P. Harty.

Nexen's financial advisers are Goldman, Sachs & Co. and RBC Capital Markets. It is receiving legal counsel from a Blake, Cassels & Graydon LLP team that includes Pat Finnerty, Jeff Bakker, Ross Bentley, John Eamon, Shlomi Feiner, Michael Gans, Jason Gudofsky and Caroline Helbronner, and Paul, Weiss, Rifkind, Wharton & Garrison LLP's Jeanette Chan, Andrew Foley and Edwin Maynard. Nexen's in-house counsel is led by senior vice president Alan O'Brien and vice president Rick Beingessner.

The Nexen board is advised by Richard A. Shaw PC and Burnet, Duckworth & Palmer LLP.

Tags: Cnooc Ltd. | energy | industrials | mergers and acquisitions | oil

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