Canadian Prime Minister Stephen Harper approved Cnooc Ltd. (883)’s $15.1 billion takeover of Nexen Inc. (NXY), the largest-ever foreign acquisition by a Chinese company, and Petroliam Nasional Bhd.’s C$5.2 billion ($5.26 billion) takeover of Progress Energy Resources Corp. (PRQ)
The deal by Beijing-based Cnooc gives the state-owned company a stake in Canada’s largest oil-sands project and the biggest position in the Buzzard oil field in the U.K. North Sea.
“The talk around town was that these deals would get done,” said Dan Cheng, a fund manager at Matco Financial Inc., which oversees about C$370 million in assets, including Progress Energy. “It would have been a surprise if they weren’t approved.”
China is securing global reserves to feed demand in the world’s second-largest economy, which accounted for half of the world’s oil consumption growth in 2011, according to the U.S. Energy Information Administration. Harper, who has touted Canada as an emerging “energy superpower,” has called it a national priority to diversify energy exports, sending less to the U.S. and more to Asia.
“It’s important to have clarity on this, not just for Canada’s foreign relations with certain superpower nations but also to ensure timely development of these very important resources,” said Robert G. Gill, portfolio manager at Toronto- based Aston Hill Financial, which has more than C$6 billion in assets under management.
The two bids, approved on Dec. 7, tested Harper’s ability to balance the need to bolster economic relations with Asian economies without letting them gain too much influence over the world’s third-largest pool of oil reserves.
Industry Minister Christian Paradis said on yesterday’s CTV’s “Question Period” program that it was important to make sure Cnooc provided “significant undertakings” for governance, transparency, disclosure, and compliance.
“We made sure that we would have the best deal that we could to provide a net benefit to Canada,” Paradis said. “After that, what was important was to go out and clarify the rules for the future, because what we see is a trend: The state- owned enterprises now are getting more and more in the business of the oil-sands.”
Canada’s government decided it was time to send “a clear message” on its position of oil-sands ownership by foreign state-owned companies, Paradis said.
“I express my appreciation for Canada’s welcome of our investment,” Wang Yilin, chairman of Cnooc, said in a Dec. 8 statement. The deal “recognizes the long-term economic benefits for Calgary, for Alberta and for Canada. Our company will also benefit by adding Nexen’s impressive assets and outstanding employees to our worldwide operations.”
While allowing the takeovers, Harper said Canada won’t approve state-owned companies taking controlling interests in any more oil-sands projects, except in “exceptional circumstances.”
Harper told reporters on Dec. 7 that these were “difficult decisions” that reflect “the broad views” of Canadians. Canada relies on exports for a third of economic output and counts on energy products for almost a quarter of those shipments.
Canada is effectively “grandfathering the Cnooc and Petronas deals,” Stephen Wortley, a partner at McMillan LLP and chairman of the Canadian law firm’s Hong Kong office, said in an e-mail. “At the same time, the government is signaling that tougher standards will be forthcoming especially in the oil sands, where there is a concern about the potential for concentration” of foreign state-owned companies, he said.
“From a perspective of industry this is the perfect solution,” said John Stephenson, who helps manage C$2.7 billion at First Asset Management Inc. in a telephone interview from Toronto. “You get the benefit of patient capital servicing value for investors and you don’t give up control, which is really the issue most Canadians feel passionately about.”
Shares (NXY:US) of Calgary-based Nexen rallied 15 percent to $26.94 in U.S. trading on Dec. 7 after exchanges closed, 2 percent below Cnooc’s $27.50 offer. The Canadian dollar strengthened, rising 0.3 percent to 98.84 cents per U.S. dollar as the announcements were made.
The Cnooc-Nexen deal is the biggest foreign takeover by a Chinese company, according to data compiled by Bloomberg. The transaction is the biggest in Canada since Calgary-based Suncor Energy Inc. (SU) bought Petro-Canada in August 2009 for about $18 billion. Through its C$2.1 billion takeover of Opti Canada Ltd. last year, Cnooc already owns 35 percent of the Long Lake oil- sands project operated by Nexen. It would gain Nexen’s 20 percent interest in the Usan offshore Nigerian project operated by a unit of Total SA.
“This is an important milestone in the process and confirms our belief that this transaction provides a number of significant benefits to Canada and to Nexen,” Kevin Reinhart, Nexen’s interim president and CEO, said in a statement. “We remain focused on working with Cnooc to bring this transaction to a close.”
Progress shares, which surged 74 percent on the day the first bid by Petronas was announced June 28, closed at C$19.35 in Toronto. Petronas offered C$22 a share.
“We’re obviously quite pleased with the decision,” said Michael Culbert, chief executive officer of Calgary-based Progress, by telephone. “We know that this has been a difficult decision to make and we don’t take that lightly.”
The acquisition of Progress by Petronas gives the Malaysian state-owned company gas reserves to build a liquefied natural gas export facility along the British Columbia coast at a cost of C$9 billion to C$11 billion, the companies said last week. The deal is the third-biggest foreign takeover in Canada this year.
Azman Ibrahim, a spokesman for Petronas in Kuala Lumpur, declined to comment.
Petronas has the world’s largest LNG-producing site in Sarawak, Malaysia, according to its website, and also operates the world’s largest LNG carrier fleet.
The Canadian decisions came on the same day Glencore International Plc (GLEN)’s C$6.1 billion takeover of Viterra Inc. (VT), Canada’s largest grain handler, received Chinese regulatory approval. The acquisition is the second largest in the country this year.
Investment by Chinese state-owned companies in Canada’s energy industry has become a contentious issue, and the deals represent the end of state-owned companies buying Canadian oil- sands interests, not the beginning, Harper said.
Still, the decision “will serve as a catalyst for inbound investment by Chinese private concerns into the Canadian market place,” said Wortley at McMillan. “We are already seeing significant activity in this area.”
Fifty-eight percent of Canadians wanted the government to block the Nexen takeover, according to an online poll of 1,000 people taken Oct. 10 to Oct. 11 by Angus Reid Public Opinion.
The opposition New Democratic Party called the Cnooc approval “irresponsible” because most Canadians oppose the purchase.
“This is a farce,” Peter Julian, the NDP’s spokesman on natural resources, said in a statement. “While Conservatives admit that under the new rules this transaction is not a net benefit to Canadians, they have approved it anyway.”
Natural Resources Minister Joe Oliver has said the country’s biggest resource projects will require almost C$650 billion of investment to develop in the next decade.
“In Canada alone, the biggest source of foreign capital is probably state-owned Chinese capital,” Richard Elliott, a partner in the competition and foreign investment review practice at Davies Ward Phillips & Vineberg LLP, said in a telephone interview. “If they’re going to largely cut off that source of capital, what’s that going to mean?”
Harper said Canada will raise the threshold for foreign- takeover reviews by private investors to C$1 billion in enterprise value as earlier planned, while the existing threshold of C$330 million in asset value will continue to apply to state-owned enterprises. Canada’s industry minister also will have the ability to extend the review period to take national security analyses into account, Harper said.
Foreign state-owned businesses will still be welcome to acquire minority stakes and enter into joint ventures with Canadian businesses, Harper said.
Cnooc, which received approval from the European Union Dec. 7 for the deal, hasn’t said whether U.S. authorities have approved its takeover of Nexen’s assets in the U.S. Gulf of Mexico, where the Calgary company gets 8 percent of its production.
Natalie Earnest, a spokeswoman at the U.S. Department of the Treasury that oversees the Committee on Foreign Investment in the U.S., declined to comment in an e-mail, citing confidentiality rules.
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 Corp. after U.S. lawmakers proposed legislation to block it.
Cnooc had already made several commitments to Canada to win support for the Nexen sale. These include listing its shares on the Toronto Stock Exchange (SPTSX), establishing Calgary as its base for North and Central America and maintaining Nexen’s employment levels and capital spending program.
Cnooc accepted management and employment conditions set by the Canadian government, two people familiar with the matter said Nov. 20.
The deal will also benefit Cnooc’s domestic operations, allowing it to “transfer some of the shale gas and deepwater expertise back into China,” Gordon Kwan, head of energy research at Mirae Asset Securities HK Ltd., said by telephone. “Nexen’s Gulf of Mexico assets will help Cnooc further develop South China Sea reserves.”
Approval of the Petronas bid came after Paradis blocked the bid on Oct. 19 and gave the companies 30 days to make additional concessions.
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