Even as the Canadian government reminds foreign acquirers of its power to quash takeovers, investors are still better off wagering on a deal for Calgary- based oil-and-gas explorer Nexen Inc. (NXY)
Canada last week rebuffed a bid by Malaysia’s state-owned oil company for Calgary-based Progress Energy Resources Corp., raising concern that Nexen’s planned purchase by Cnooc Ltd. (883) of China may suffer the same fate. After Nexen’s shares dropped more than 6 percent on the news, the stock traded at its biggest discount to the takeover offer since the $15.1 billion deal was announced in July, according to data compiled by Bloomberg.
The Nexen deal hinges in part on China’s willingness to approve Canadian investments there, a person with knowledge of the matter said this week, and Taylor Asset Management Inc. and Veritas Investment Research Corp. say Canada will likely allow it to proceed. Even if the government scuttles Cnooc’s purchase, that won’t stop major energy companies such as Royal Dutch Shell Plc (RDSA) and Chevron Corp. (CVX:US) from mulling bids for Nexen, according to Prospector Partners Asset Management LLC. Buyers would be drawn to Nexen’s assets that span the Gulf of Mexico, the U.K.’s North Sea and Canada’s oil sands, said Aston Hill Financial Inc. (AHF)
“I still like the chances for both the Nexen deal and the Progress deal,” Sam La Bell, a Toronto-based analyst for Veritas, said in a telephone interview. “If you look at where the oil growth is coming from around the world, there aren’t a lot of jurisdictions that are as stable as Canada and as attractive as Canada. If these deals are rejected and it has to do with the national oil company structure, it puts the super majors back in the driver’s seat” as acquirers.
Cnooc said today it’s planning around the assumption that the Nexen purchase will be approved. The Chinese oil explorer expects the deal to be completed by year-end and is prepared for all possible outcomes, Chief Financial Officer Zhong Hua said on a conference call today.
Peter Hunt, a Cnooc spokesman, said in an e-mail yesterday that “our regulatory application is proceeding as normal.”
Patti Lewis, a spokeswoman at Nexen, didn’t return a phone call or e-mail seeking comment yesterday.
Canada blocked Petroliam Nasional Bhd.’s C$5.2 billion ($5.24 billion) purchase of Progress Energy (PRQ) on Oct. 19, saying it wasn’t convinced that the bid by the Kuala Lumpur-based company, known as Petronas, was in its national interests.
“I am not satisfied that the proposed investment is likely to be of net benefit to Canada,” Industry Minister Christian Paradis said in a statement. Petronas has 30 days to appeal or provide additional concessions, at which point the government will make a final decision, Paradis said.
Emma Stevens, a spokeswoman at Progress Energy, didn’t respond to a phone call seeking comment. Azman Ibrahim of Petronas didn’t immediately respond to an e-mail outside normal business hours.
Progress Energy’s shares dropped by the most in more than three years on Oct. 22, the first trading day after the rejection, and the stock was at C$18.98 as of yesterday, 14 percent below Petronas’s C$22 offer price.
Shares of Nexen, which also needs to win government approval of its takeover by China’s state-owned oil producer, also slumped, falling 6.7 percent this week through yesterday.
Nexen’s U.S.-listed shares ended yesterday at $23.71 a share (NXY:US), 14 percent below Cnooc’s $27.50-a-share bid. That’s the widest gap since the deal was announced on July 23, data compiled by Bloomberg show.
Today, Progress Energy shares fell 1.7 percent to C$18.65, while Nexen rose 0.2 percent to $23.76 in New York.
“Markets hate uncertainty, and the uncertainty regulators have added to the equation is due to the decision on the Progress deal,” Robert Gill, a Toronto-based money manager at Aston Hill, which oversees about C$6 billion including Nexen shares, said in a phone interview. Nexen’s stock declined on the view that it “can’t be worth the same value the day after the regulators’ decision on Progress as it was the day before.”
The Canadian government’s decision was more of an extension of the Progress Energy review period than an outright rejection of the deal, according to Veritas’s La Bell, who said the news also doesn’t change the potential for Cnooc to obtain approval for its Nexen purchase.
“This is not a refusal” of the Progress Energy takeover, he said. The plunge in Nexen’s stock was “a bit of an overreaction by the market. The deal isn’t dead.”
David Taylor, president and chief investment officer overseeing $640 million at Taylor Asset Management in Toronto, also said both deals are still likely to clear government hurdles. He said he took advantage of the drop in Nexen’s share price this week to add to his stake (NXY:US) in the company.
“I don’t think anything has changed,” said Taylor, who also helps run the IA Clarington Focused Canadian Equity Class fund. “The body language from the prime minister is that we desperately need foreign capital to help develop our plays.”
Prime Minister Stephen Harper has called it a “national priority” to sell more natural resources to Asia, and Natural Resources Minister Joe Oliver said on Sept. 4 that Canada needs an “immense” amount of capital to develop its oil and gas.
Current proposed projects in Canada’s oil sands require investments of C$220 billion, the Canadian Energy Research Institute said in a March report.
Nexen, which was formed when Occidental Petroleum Corp. combined its Canadian units into one company in 1971, gives a buyer access to Canada’s vast oil deposits, offshore production in the U.K.’s North Sea, West Africa and the Gulf of Mexico and drilling opportunities in shale-rock formations. It produced 213,000 barrels of oil equivalent per day in the second quarter.
“Canada has the resources and needs money,” Richard Howard, co-manager of the Prospector Capital Appreciation Fund (PCAFX:US) at Prospector Partners, which oversees about $2.5 billion, said in a phone interview from Guilford, Connecticut. Nexen is among the fund’s top five holdings. “I’m pretty optimistic” that the deal gets done, he said.
Canada plans to ask China to allow several transactions in exchange for approval of the Nexen takeover, underscoring that reciprocity will be part of foreign investment policies Harper’s government will release soon, according to a person with knowledge of the matter, who spoke this week on the condition of anonymity because the discussions aren’t public.
The prime minister has “focused on China as Canada’s next energy market,” Aston Hill’s Gill said. “So I think this is a real consideration for him and it will help to guide his thinking on Cnooc and Nexen more so than how regulators will deal with Petronas and Progress.”
Still, betting on either deal is risky, according to Sachin Shah, a merger arbitrage strategist at Tullett Prebon Plc in Jersey City, New Jersey. The Canadian government made it harder to predict its actions when it caught traders off guard by rejecting Petronas’s deal for Progress Energy, he said. The statement from the Minister of Industry was released just before midnight in Toronto on Oct. 19.
“Around the stroke of midnight, the Progress-Petronas deal turned into a pumpkin,” Shah said in a phone interview. “Now we have to find out if Progress stays a pumpkin or goes back to being the beautiful deal that it is.”
For that reason, it’s “premature” to bet that Nexen’s takeover by Cnooc will win approval, he said. “I want to say that they should approve the Nexen deal, but you ultimately have to wait for Progress.”
Before the Cnooc deal was announced, Nexen shares were trading at $17.06.
Should the government block Cnooc’s bid, Prospector Partners’s Howard said a multinational oil company such as Shell (RDSA), Chevron or Exxon Mobil Corp. (XOM:US) could set its sights on Nexen.
Such a move isn’t unprecedented, he said, referring to the bidding war for Unocal Corp. in 2005. Cnooc was forced to abandon a $19 billion hostile bid for El Segundo, California- based Unocal as U.S. lawmakers proposed legislation to block it, leaving San Ramon, California-based Chevron as the winning bidder.
Spokesmen for Chevron, The Hague-based Shell and Irving, Texas-based Exxon declined to comment on whether the companies would consider bidding for Nexen.
“It has some pretty attractive assets,” Aston Hill’s Gill said. “Should the deal with Cnooc not be allowed to pass, it’s possible that another company would step up and be a suitor.”
Still, “I wouldn’t count out the Cnooc deal yet at this stage,” he said.
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