Bloomberg News

Cnooc Purchase of BP’s $7.1 Billion Argentine Unit Scrapped

November 09, 2011

(Updates shares in fifth paragraph.)

Nov. 7 (Bloomberg) -- Cnooc Ltd.’s deal to buy BP Plc’s $7.1 billion stake in Argentine crude producer Pan American Energy LLC collapsed, 10 days after Argentina’s president ordered oil companies to repatriate export revenue.

BP will repay a $3.5 billion deposit it had received for the sale by Nov. 14, the company said after Bridas Corp., equally owned by Cnooc and the billionaire Bulgheroni family, announced Nov. 5 that the deal was canceled for “legal reasons.” Bridas owns 40 percent in Pan American and the purchase of the remaining 60 percent was pending Argentine antitrust approval.

The failure of the deal to buy Argentina’s biggest oil exporter means Cnooc, China’s largest offshore energy explorer, may struggle to meet its production growth targets next year, according to Gordon Kwan, Mirae Asset Securities Ltd.’s head of regional energy research in Hong Kong.

“It’s going to be very challenging for the company,” Simon Powell, a CLSA Ltd. analyst, said by phone today from Hong Kong. “Cnooc is going to have to try do more M&A deals globally to make up for it.”

Cnooc dropped 2.2 percent to HK$14.92 in Hong Kong, taking its decline this year to 19 percent. BP, little changed at 452.80 pence in London, has declined 2.7 percent this year.

The decision comes less than two weeks after Argentina’s President Cristina Fernandez de Kirchner, re-elected on Oct. 23, ordered energy and mining companies to repatriate future export revenue in a bid to slow accelerating capital flight from South America’s second-biggest economy.

Government Intervention

The move by Fernandez, who nationalized the $24 billion pension fund industry and has moved to block foreigners from purchasing rural land since taking office in 2007, was a sign that she will likely “increase intervention and pressures on the private sector” heading into her second term, said Daniel Kerner, a Latin America analyst at the Eurasia Group.

“Bridas has informed BP of its decision to cancel the sale,” Buenos Aires-based Bridas said in an e-mailed statement. “The decision is motivated by legal issues, the manner in which BP behaved during the transaction and its signing.”

Ratings Downgrade

Pan American was downgraded by both Moody´s Investors Service and Fitch Ratings last month after the government’s decision to increase control of export revenue. Fitch lowered its rating to B+ from BB-, citing “increased intervention” by Argentina.

Bridas said in its statement that neither Fernandez’s announcement nor the economic crisis in Europe had anything to do with the decision. BP said separately that the sale, initially due to be completed by June 30, “had been delayed because of the Argentine antitrust and Chinese regulatory approvals required.”

BP sought to sell Pan American as part of its pledge to divest as much as $45 billion of fields after the Gulf of Mexico spill last year to shore up its balance sheet.

“BP does not currently plan to divest additional assets to offset proceeds which would have been received from” the Pan American sale, the London-based company said today in a statement.

The producer has sold more than $19 billion in assets, excluding Pan American, since June 2010 and had about $18 billion in cash at the end of the third quarter.

‘Not Desperate’

BP Chief Executive Officer Bob Dudley said last month that the stake is “not an asset we’re desperate to sell.”

Cnooc said in a statement yesterday that the decision by Bridas “will not have any material adverse effect on the existing business or financial position of the group.”

“It’s a short-term negative for Cnooc, as the firm could struggle with its 7-11 percent production growth target for 2012 without this BP deal,” said Mirae’s Kwan. “Long term, investors should be happy to see that Cnooc is prioritizing economics over completing deals at all costs. Going forward, Cnooc must discover some big fields in deep water to sustain the firm’s above-average growth.”

BP was willing to let the transaction expire after a Nov. 1 deadline and continue as a partner in the Pan American venture, a person familiar with the transaction said in September. The deal was opposed by Argentine politicians, the person said.

Bridas is willing to continue negotiations, the company said. BP said on Oct. 25 that each party would have the right to terminate the accord without notice after Nov. 1 unless both agreed to extend the deadline and that it expected the deal to be completed in 2012.

“BP will now be considering all its strategic options regarding PAE,” spokesman Mark Salt said in an e-mail yesterday.

It will pay $700 million to Bridas to settle any or all past claims and to end “restrictive covenants” between the sides, BP said.

--With assistance from John Glover in London, Nathan Crooks in Caracas, Aibing Guo in Hong Kong and Chua Baizhen in Beijing. Editors: Andrew Hobbs, Stephen Cunningham, Randall Hackley.

To contact the reporter on this story: Rodrigo Orihuela in Buenos Aires at rorihuela@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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