Nexen Inc. staged its biggest rally since July, indicating Cnooc Ltd’s (883) $15.1 billion takeover offer for the oil and gas producer is unaffected by demands from Alberta to keep management and jobs in Canadian hands.
Alberta Premier Alison Redford requested the federal government insure Calgary-based Nexen’s management and board remain at least 50 percent Canadian. The provincial government also wants Chinese state-owned Cnooc to maintain current employment levels for five years instead of three and keep capital spending plans intact, according to a person familiar with the matter who spoke on condition of anonymity because the discussions are confidential.
“At face value, it looks like really basic normal stuff,” Alfredo Scialabba, a New York-based special situations analyst for GFI Group Inc. (GFIG:US), said in a telephone interview. “If it’s just that, this wouldn’t really derail the deal.”
Nexen’s stock rose 1.1 percent yesterday to $25.22 in Toronto, the biggest gain since the Cnooc bid was announced July 23, before falling today. It closed at $24.99 in Toronto.
The shares listed in New York rose 0.8 percent to $25.51 yesterday, narrowing the difference with Cnooc’s $27.50 per share offer to the least since Sept. 17. They fell 0.1 percent today to $25.48.
The request from Redford’s government came in a recommendation provided to Industry Minister Christian Paradis and the government’s investment review division.
Alberta’s conditions may increase costs and risks for Cnooc at a time when oil-sands producers face a rising supply of North American crude and a lack of pipelines threatens to stall sales. Prime Minister Stephen Harper’s government is reviewing the bid under the nation’s foreign takeover law, which specifies transactions need to have a “net benefit” to the country in order to win approval.
Redford’s government asked Cnooc to maintain workforce levels for at least five years, to strengthen commitments to keep capital spending plans intact and to clarify plans for research and development, the person said. Alberta’s government has indicated it would not object to the transaction if the conditions were met.
“I don’t see any deal-breaker in this,” Scialabba said.
Premier Redford has said the transaction is beneficial, said Jay O’Neill, her director of communications for Redford. He declined to comment directly on the details of Alberta’s submission to the federal government.
“We were asked for our position and we did submit that position,” O’Neill said. “Our premier has been pretty clear in terms of her discussions around the deal since it was first announced and that there does appear to be significant benefit not only for Alberta but also Canada.”
Asked about Alberta’s demands, Paradis told reporters today the government consults provinces and other stakeholders in its review. He also said the government will take as much time as needed and an extension of the review is a possibility.
Under Canadian law, the government can unilaterally extend the original 45-day review period by 30 days, and extend the review further if Cnooc agrees. The government said Aug. 29 it received the application.
In the July 23 announcement, Cnooc pledged to follow through on Calgary-based Nexen’s capital spending plans and maintain the company’s employment level and management, without giving details or a time frame.
Cnooc has also promised to make Calgary the head office of its North American operations, as well as list its common shares on the Toronto Stock Exchange.
Steven MacKinnon, a Canadian spokesman for Cnooc, said the company doesn’t comment on the regulatory process. Cnooc is controlled by state-owned China National Offshore Oil Corp., which indirectly owns 64.4 percent of the company’s shares.
“We are of the view this transaction has a high likelihood of being approved because we think that it is on policy with the Harper administration with respect to their energy policy,” Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, said in a telephone interview. “It has always been expected -- this is a very significant transaction - - that there would be material undertakings being required and those undertakings would always include employment, capex, and environmental.”
Lawmakers in the House of Commons yesterday defeated a motion put forward by the opposition New Democratic Party calling on the government to hold public hearings into foreign takeovers in the country’s energy sector by state-owned enterprises. The NDP said today the government should reject the transaction, citing concerns about whether Cnooc will protect jobs, maintain environmental standards and keep the head office in Canada.
Harper has said selling more of the nation’s natural resources to Asia is a “national priority” and his government has said Chinese investment in resources is welcome. China, the world’s second-largest economy, is seeking greater access to Canada’s oil sands, the world’s third-largest pool of reserves, to support growth.
He told reporters today the bid raises tough policy issues the government needs to consider.
“This particular transaction raises a range of difficult policy questions, difficult forward-looking issues, and those things will all be taken into account under the act in assessing the net benefit of this investment,” Harper said. “We have approved many transactions, we have significantly modified some, and we have blocked some transactions.”
While not bound by Redford’s recommendations, Canada routinely seeks the opinion of provincial leaders as part of its reviews. Opposition by Saskatchewan Premier Brad Wall to BHP Billiton Ltd. (BHP)’s 2010 bid for Potash Corp. of Saskatchewan Inc. foreshadowed the federal government’s rejection of that takeover.
Alberta’s push for firmer commitments from Cnooc may be an attempt to shield the province should a slump in energy prices encourage the company to change its plans.
Canada sued U.S. Steel Corp. (X:US) in 2009 over the steelmaker’s 2007 acquisition of Stelco Inc., saying it hadn’t complied with pledges it made on production and employment. The company argued a decline in economic conditions beyond its control caused a downturn in its business and made it impossible for it to meet the promises it made when it bought Stelco.
The government and the company settled last December, with U.S. Steel agreeing to maintain operations in Canada until 2015 and make C$50 million ($50.7 million) in additional capital investments.
As part of the proposal by Cnooc, details of which have not been made public, the Chinese company pledged 25 percent Canadian composition of its board, the person said. The company also said it would maintain Nexen’s workforce at no less than 80 percent of current levels for three years, they said, a commitment the Albertan government wants to extend by two years.
Redford’s government is also recommending the federal government receive firm commitments from Cnooc on meeting environmental standards, the person said.
Nexen shareholders approved the bid on Sept. 20, with about 99 percent of those who voted casting ballots in favor.
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