Bloomberg News

Cnooc-Petronas Record Bids Test Canada’s Taste for Asian Deals

December 06, 2012

The fate of two of the biggest energy takeovers by Asian companies this year could be decided early next week, when Canada’s government may rule on bids by Cnooc Ltd. (883) and Petroliam Nasional Bhd.

Cnooc’s $15.1 billion takeover of Nexen Inc. (NXY) and the C$5.2 billion ($5.2 billion) offer for Progress Energy Resources Corp. (PRQ) by Petronas, as Malaysia’s state-owned energy company is known, will drive up investments by Asian companies in North American energy assets to a record $32.5 billion. That’s 18 times higher than acquisitions announced in 2007.

The deals must show a “net benefit” to Canada, holder of the world’s third-largest oil reserves. Its rejection of BHP Billiton Ltd.’s bid for the nation’s biggest potash producer and an adverse ruling on Petronas’s offer in October led investors to mark down the chances of them succeeding. Blocking Cnooc may draw retaliation from China.

“Everybody understands Canada needs Asia’s money and markets in the long run,” said Laban Yu, an analyst at Jefferies Hong Kong Ltd. “Canada may see zero investment from China in the next five years if they deny Cnooc’s acquisition of Nexen. Rejecting both would send a chilling message to Asia’s state-owned oil producers that they are not welcome in the country at all.”

Trading Discount

Nexen is trading at an 8.5 percent discount to Cnooc’s bid price of $27.50 a share. Progress Energy is 8 percent less. Progress Energy had plunged 15 percent in the week after Canada ruled against the Petronas bid on Oct. 19 before recovering as the Malaysian company offered further concessions.

“Because they don’t like the Chinese buying some of their companies they had to take it out on us as well,” former Malaysian Prime Minister Mahathir Mohamad, who is an adviser to Petronas, said in a Dec. 5 interview. “If we lose, there are other places. Petronas is very much in demand.”

Asian companies are seeking assets in North America after the continent last year reported the world’s biggest increase in oil and gas production after the Middle East. A surge in gas produced by cracking open shale rocks in the U.S. made it the world’s biggest producer of the fuel in 2009. Canada requires almost C$650 billion of investments over the next decade to develop its biggest resource projects.

The U.S. will become a net exporter of liquefied natural gas starting in 2016 and will be a net shipper of natural gas by 2020, beating last year’s forecast by two years, the U.S. Energy Department said in an early release of its Annual Energy Outlook 2013 report on Dec. 5. The increasing production of oil, gas and renewable fuels will reduce the share of net imports in total U.S. energy consumption to 9 percent by 2040 from 19 percent in 2011, the department said.

Alternative Market

The takeover of Progress Energy will help Canada develop gas resources and find an alternative market, Petronas has said. Acquiring the Calgary-based explorer would give Petronas ownership of the second-largest holder in the Montney shale-gas area of British Columbia and full control of the three Progress Energy fields in which Petronas bought a stake last year.

“It’s quite a huge investment,” Petronas Chief Executive Officer Shamsul Azhar Abbas, said Nov. 29 in Kuala Lumpur. “We’re basically helping the country to find an alternative outlet. They’re counting on one market, the U.S.”

Progress Energy got all of its revenue from Canada in 2011, according to data compiled by Bloomberg.

Proven, Probable

Last year, 29 percent of Nexen’s daily oil and gas production of 207,000 barrels of oil equivalent was in Canada, according to the company’s annual report. The U.K. accounted for 43 percent of the company’s output. Nexen had 77 percent of its net proven and probable reserves in Canada at the end of 2011, according to the report.

With the majority of Nexen’s production located outside Canada, Cnooc may have a better chance of winning approval for its bid, Neil Beveridge and Ying Lou, Hong Kong-based analysts at Sanford C. Bernstein, in an Oct. 22 report.

An approval would give China assets needed to feed the world’s fastest-growing economy. China’s state-run companies, backed by the world’s biggest foreign-exchange reserves of $3.3 trillion and cheap loans by banks, have snapped up oil, gas and mineral assets from Australia to Africa and Latin America.

Canadians Uneasy

Many Canadians are uneasy about deals such as Cnooc’s, Canadian Prime Minister Stephen Harper said. Fifty-eight percent of Canadians believe the Nexen bid should be blocked, an online Angus Reid Public Opinion survey of 1,000 people conducted from Oct. 10 to Oct. 11 showed. The New Democratic Party, Harper’s main rival in Parliament, has opposed the bid.

Scrutiny of foreign takeovers has stymied deals in North America before. Cnooc was forced in 2005 to abandon a $19 billion hostile bid for El Segundo, California-based Unocal as U.S. lawmakers proposed legislation to block it.

Canada rebuffed Melbourne-based BHP (BHP)’s $40 billion hostile takeover bid for Potash Corp. of Saskatchewan Inc. in 2010, the second rejection in 25 years following its blocking of Alliant Techsystems Inc. (ATK:US)’s bid for MacDonald Dettwiler & Associates Ltd. (MDA)’s space business in 2008.

Still, Canada needs “hundreds of billions of dollars of capital” to unlock the potential of its oil sands, Pacific Coast liquefied natural gas export facilities and emerging shale developments, according to Eric Nuttall, a portfolio manager who oversees $110 million at Sprott Asset Management Inc. in Toronto.

“It’s clear that internally, domestic capital cannot fund such projects in a timely manner, thus as a country we’re forced to look externally at funding,” Nuttall said. Rejection of the two bids “would be hugely destructive to the value of many Canadian companies,” he said.

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editors responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net


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