The China National Offshore Oil Corporation (
announced China's largest foreign acquisition
today, setting off a predictable flurry of geopolitical punditry.
For investors the more relevant question is whether the huge
purchase is good business for CNOOC.
[caption id="attachment_68132" align="alignright" width="300"
caption="The Nexen building in downtown Calgary"]
Actually it may be. The state-controlled Chinese oil
conglomerate agreed to buy Canada's Nexen Inc. for $15.1 billion.
That represents a 61% premium over Friday's closing market price, a
bulge that might look like overpaying under normal
But these are not quite normal circumstances for global oil
shares, whose value has been beaten down to the point where they
may be worth extraordinary premiums to strategic
buyers.Calgary-based Nexen has been a particularly troubled
company, its CEO departing earlier this year after the loss of a
big concession in Yemen and production setbacks domestically in
Canada. Its shares have fallen by 25% over the past year, compared
to a 9% loss for CNOOC itself.
Viewing the acquisition through a price-to-reserves lens, the
Chinese buyer looks much shrewder. CNOOC "did a nice job adding oil
reserves at less than $20 a barrel," 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."
While Nexen is best known for its holdings in Canada's
challenging oil sands fields, it actually offers a diverse grab bag
of assets, giving CNOOC its first foothold in shale gas, plus oil
fields in the Gulf of Mexico and Africa. CNOOC needs the fresh
pastures as earlier this year it lost its historic
monopoly on offshore drilling in China
. Nor is CNOOC's the most expensive oil purchase of the summer.
Malaysian state company Petronas agreed to pay 77% over market
price last month to buy another Canadian oil driller, Progress
Energy Resrouces, for $5.3 billion
The market's first reaction to CNOOC's big buy was negative, the
Chinese firm's shares dropping by 3.7%. But that is typical for
acquiring firms. Long-term investors should take a good look at the
deal. CNOOC's timing could turn out to be prescient.