CNOOC Gets Nexen's Nod - Analyst Blog

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Chinese energy giant CNOOC Ltd. 's ( CEO ) bid to acquire the Canadian energy producer Nexen Inc. ( NXY ) for approximately $15.1 billion in cash has successfully cleared one barrier with the approval by Nexen shareholders.

On September 20, 99% of Nexen's common shareholders and 87% of its preferred shareholders voted in favor of the deal. Per the agreement, which was announced on July 23, CNOOC intends to buy all the outstanding common shares of Nexen for $27.50 per share, representing a premium of 61% to its closing price on the New York Stock Exchange on July 20.

However, public opinion regarding the deal has been overwhelmingly negative with detractors concerned about such a significant possession going into Chinese hands. We note that the CNOOC bid marks the biggest Chinese takeover attempt so far.

The contract is still subject to the approvals from Canada's industry ministry and from U.S. and European regulators. The developed world will now be faced with a potent test of accepting Chinese capital that would also mean the relinquishing of control over strategic resources.

Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, and has its biggest reserves in the Canadian oil sands. Apart from oil sands, Nexen remains dynamic in natural gas exploration in shale rock formations. It owns approximately 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia.

China's third-largest oil company, CNOOC's current production gives it only nine years worth of reserves that represents one of the lowest reserves among key oil companies in the world. The upcoming deal would raise CNOOC's proven reserves by 30% and will help it to vastly expand its holdings in Canada, where it has already spent about $2.8 billion since 2005. Moreover, buying Nexen would make CNOOC the operator of the largest oil field in the U.K. and the biggest contributor to Forties Blend crude − Buzzard.

Being the world's second-largest economy, China has a huge energy requirement. The acquisition of Nexen is in sync with the present strategy of CNOOC and other Chinese biggies to make a deeper international foray in order to meet domestic demand.

According to the International Energy Agency, CNOOC and other major state-owned Chinese energy companies made less than $2 billion worth of total acquisitions between 2002 and 2003. Notably, it jumped to nearly $48 billion in 2009 and 2010.

We maintain our long-term Neutral recommendation on CNOOC. The company currently retains a Zacks #4 Rank (short-term Sell rating).


 
CNOOC LTD ADR (CEO): Free Stock Analysis Report
 
NEXEN INC (NXY): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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