Bloomberg News

Canada Shifts Toward China With $15 Billion Nexen Deal

July 24, 2012

China Ousts U.S. in Canada Oil Market With Bid for Nexen

The headquarters of Cnooc Ltd. stand in Beijing. Photographer: Nelson Ching/Bloomberg

Cnooc Ltd. (883)’s $15.1 billion cash takeover bid for Nexen Inc. (NXY:US) signals a Canadian shift toward China and away from the U.S. as the nation’s traditional oil and natural-gas partner and main export market.

Canada’s oil sands reserves, the third-largest recoverable crude deposits in the world, were developed in part by U.S. money as companies such as California’s Richfield Oil Corp. brought technology to extract bitumen from boreal peat bogs half a century ago. Now, for the first time, a Chinese company will own and operate oil-sands crude production as well as Nexen’s shale-gas assets in British Columbia, along with leases in other parts of the world.

“This is really a decoupling of the north-south axis with the U.S.,” Michael Black, a partner with Fasken Martineau DuMoulin LLP who has advised on C$8.5 billion ($8.4 billion) worth of Canadian deals by Abu Dhabi Nation Energy Co. (TAQA), said in an interview. “The U.S. guys just aren’t coming up here the way they used to. It further illustrates Chinese interest in big assets, big reserves and Canadian expertise.”

Chinese oil producers have turned more frequently to Canada after political opposition in the U.S. derailed Cnooc’s $18.5 billion bid for Unocal Corp. in 2005, and after TransCanada Corp. (TRP)’s Keystone XL pipeline route south to Texas was blocked by President Barack Obama’s administration last year.

Friendly Supplier

China, seeking to add oil and gas reserves to meet demand in the world’s largest energy-consuming country, sees Canada as a ready supplier as it prepares to expand its pipeline network to the Pacific coast for exports to Asia.

Over the past decade, Chinese companies have spent $53.4 billion on Canadian oil and gas fields and companies, compared to $30.8 billion invested in the sector by U.S. companies, according to Bloomberg data.

“Canada is politically stable, has fantastic assets and technological know-how in the oil and gas sector,” said Dan Cheng, vice president at Calgary-based Matco Financial Inc., which oversees C$375 million in assets including Canadian oil and gas companies. “Canadian politicians and companies have been going over to China a lot recently. It’s easy to speculate that there are more deals to come.”

The Canadian government, which turned down a 2010 hostile $40 billion bid by BHP Billiton Ltd (BHP) for Potash Corp. (POT:US) of Saskatchewan Inc., has to approve the transaction. Potash Corp. is the world’s largest supplier of the fertilizer, which is produced in only a handful of countries around the world.

Geographic Diversity

By comparison, less than a third of Nexen’s second-quarter oil and gas production of 207,000 barrels a day was in Canada. Cnooc nevertheless will gain access to Canadian engineers and geologists familiar with developing and operating oil sands and shale-gas projects, said Fasken’s Black. The company’s other assets include production platforms in the North Sea, the Gulf of Mexico and in Nigeria.

Canada’s oil and gas and other natural resource industries have traditionally been open to foreign investment to speed development, Lysle Brinker, director of energy equity research at IHS Herold, said by telephone from Cape Elizabeth, Maine.

“It’s in the interest of the long term viability and the health of the Canadian oil and gas industries” to approve the Nexen takeover, he said. And the Canadian government has taken a “long-term view” to recognize the energy industry needs a lot of investment to succeed, he said.

Deal Price

China’s largest offshore oil and gas explorer is paying $27.50 for each common share, a premium of 61 percent to Calgary-based Nexen’s closing price on July 20, according to its statement to the Hong Kong stock exchange yesterday. Nexen’s board recommended the deal to its shareholders.

Cnooc was 3.6 percent at HK$14.88 at 1:01 p.m. compared with a 0.2 percent gain in the benchmark Hang Seng Index in Hong Kong after a delayed start to trading because of a typhoon.

“The 61 percent premium is huge, it’s totally unreasonable,” said Laban Yu , an analyst at Jefferies Hong Kong Ltd., who cut his rating on Cnooc shares to underperform from hold after the deal was announced yesterday.

Cnooc last year acquired Nexen’s partner Opti Canada Inc., which held a minority stake in the Long Lake project, a production operation that uses steam to melt underground seams of tar-like bitumen and refines it in giant vats called upgraders. The joint venture allowed them to better understand the business as well as the political context, said Wenran Jiang, an adviser to the Alberta government and director of the Canada-China Energy and Environment Forum.

“The political context in Canada is very good at the moment,” Jiang said in an interview. “The Chinese have been careful to step up their involvement in Canada slowly. This isn’t coming out of nowhere.”

Strained Ties

Canada’s traditionally close energy ties to the U.S. were strained in the past year by political controversy that threatened to stall TransCanada’s plans to ship crude from Alberta to the Texas Gulf Coast via its Keystone pipeline. As TransCanada redesigns the project to overcome U.S. environmental objections, the Canadian government stepped up its courtship of China.

Canadian Prime Minister Stephen Harper and Alberta Premier Alison Redford have visited China this year to promote Canada’s energy industry and build trans-Pacific ties. Harper told Chinese business leaders in February during a dinner in Guangzhou, China, that he wants to take Canada’s economic partnership to “the next level.”

“We want to sell our energy to people who want to buy our energy,” Harper said at the time. “It’s that simple.”

The Nexen deal is one of two major Chinese energy acquisitions announced yesterday. China Petrochemical Corp. (1314) agreed to spend $1.5 billion for a 49 percent stake in Calgary- based Talisman Energy Inc. (TLM)’s U.K. unit after spending $2.2 billion last year to buy Canada’s Daylight Energy Ltd.

Nexen Options

Before the Nexen purchase was announced, trading in bullish options on the Canadian company’s U.S. shares (NXY:US) last week reached the highest level since March 2008, data compiled by Bloomberg show. The activity, which included three trades that may bring profits of more than $40 million, may indicate the deal was leaked, according to Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of options market data and analytics.

Nexen has been searching for a new CEO since Marvin Romanow stepped down in January amid a slumping share price and missed production targets. Nexen’s market value had plunged 60 percent before today from a high of C$43.45 in June 2008 as prices fell for natural gas, which accounts for about 20 percent of output. Production growth also slowed more than the company expected because of setbacks at projects in Canada’s oil sands and in the North Sea.

Calgary Headquarters

“The Chinese have shown that they’re good at buying assets that have long-term value,” said Jennifer Stevenson, who helps oversee about C$5 billion in assets at Dynamic Funds in Calgary and doesn’t own Nexen shares.

Cnooc will add 900 million barrels of oil equivalent reserves at $19.94 per barrel through the deal, according to a document posted on the company’s website. Cnooc plans to boost output by as much as 2.7 percent this year to the equivalent of as much as 930,000 barrels of oil a day.

Calgary will become one of Cnooc’s international headquarters and the operations hub for overseeing an additional $8 billion in assets in North and Central America. The Chinese company will list its shares on the Toronto exchange, it said in the statement yesterday.

“This agreement diversifies our reserve base by adding to our presence in Canada while providing high quality assets,” Cnooc Chief Executive Officer Li Fanrong said today in a conference call with reporters. “We are in Canada to invest.”

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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