Seven years after the Bush White House forced Cnooc (China National Offshore Oil Corp) to abandon its takeover bid for Californian oil producer Unocal, the state owned Chinese oil supermajor has made a $15 billion bid for Canada’s Nexen.
Nexen is a Calgary Alberta tar sands producer that also owns valuation concessions in the Gulf of Mexico, the North Sea, offshore Nigeria and Yemen. Not only is the Nexen (and earlier Sinopec-Talisman Energy) deals calculated to give Beijing ownership of offshore oil and gas fields but also the advanced drilling technology that have revolutionised shale oil/deepwater oil extraction. I was stunned that Cnooc bid 27.50 loonies (Canadian $) for Nexen, an incredible 61 per cent takeover premium for Oxy’s former Canadian unit that has been mired in production woes at home and geopolitical/reserves conflicts abroad.
Wall Street does not like the Nexen deal. Nomura called it “value destructive”, pointing to the risk of integration, endemic civil war in Yemen, and protectionism / political opposition Canada/US. However, PM Stephen Harper has toned down his anti-PRC rhetoric as Canada must hedge its Keystone XL pipeline risk. It is not surprising that Cnooc shares plummeted in both Hong Kong and the NYSE since it has obviously overpaid of Nexen.
A 61 per cent deal premium is about the Chinese Politburo’s quest for oil and gas security, not the maximisation of shareholder value. After all, Nexen traded at $17 when Cnooc announced a $27.50 bid, knocking out any white knight counter bid and forcing the board to recommend a sale. It is ironic that Nexen’s operational woes in Nigeria, Lake Alberta, Yemen and the North Sea meant it traded at a valuation discount to its US and Canadian peers. Frankly, the Politburo wants to boost Cnooc production by Nexen’s 207,000 barrels and thus give a green light to this outrageous takeover premium. Energy security has literally priceless for the PRC and I expect more Chinese bid for Canadian E&P/pipeline companies in Canada.
Should investors buy Nexen now? Absolutely not. If the Obama White House and the apparatchiks in Ottowa diss the Cnooc bid, Nexen shares will plunge at least 50 per cent. This is the time to track the takeover bid in real time and be ready to short Nexen, as the arbitrageurs will. I am no expert in Canadian law but, based on my experience with the BHP potash bid, the Competition Bureau takes up to 75 days to complete is deal review even before Ottowa vets its national security dimension. I do not believe it is realistic to expect a bidding war or counter offer for Nexen.
I strongly recommend UAE investors to get smart on Canadian oil and gas producers that are now viable takeover targets for either Big Oil or emerging markets/Chinese state owned companies. After all, even Abu Dhabi’s Taqa owns and operates oil assets in Canada. Brent at $107 and ten year US Treasury bond yields at 1.40 per cent means stratospheric M&A bids financed by dirt cheap cost of capital.
Total, Occidental, Exxon Mobil and Chevron are all potential bidders. Who are the hottest Canadian oil and gas targets? In my opinion, Talisman Energy is my call as takeover bait. Its market cap is $12 billion Canadian $, down 40 per cent since last summer. 60 per cent of its production is outside Canada. It has lovely properties in Indonesia, Algeria, Qatar, Columbia, North Sea and Alberta. It has a joint venture with Sinopec. The writing is on the wall but time and a hostile bid will tell.