Investors cool to CNOOC's deal

PUBLISHED : Wednesday, 25 July, 2012, 12:00am
UPDATED : Wednesday, 25 July, 2012, 12:00am


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The China National Offshore Oil Corp's US$15.1 billion offer for Canadian business partner Nexen has failed to impress investors, who yesterday sold its shares down 4 per cent to HK$14.82.

The sell-off could largely be due to a 3.6 per cent fall in crude oil prices overnight in New York amid worries of Europe's sovereign debt problems.

But investors' concerns that China's dominant oil and gas producer might be overpaying for overseas assets to boost growth was also a factor.

'While this creates a truly Chinese global exploration and production company, the value proposition to shareholders looks less clear given the limited sources of value,' Sanford Bernstein's senior analyst Neil Beveridge said. He pointed out that CNOOC did not have operating control over most of its overseas assets.

This means savings from streamlining management by integrating the operations of Nexen and CNOOC would be small.

But Bernstein noted in a report in September that Chinese firms could offer Western firms that had drilling expertise and resources access to low-cost financing, drilling materials and services and access to the Chinese energy market.

Beveridge expects the acquisition to dilute CNOOC's earnings per share in the near term, given cost savings are limited, even though it would extend the life of its oil and gas reserves from 9.6 years to 10.3 years of production. It would also let CNOOC diversify its assets into stable countries such as Britain and Norway and expand in North America.

According to ratings agency Standard & Poor's, 71 per cent of CNOOC's reserves are domestic, while 20 per cent are in nations with high sovereign risk and 9 per cent in developed regions.

After the acquisition, its exposure to China would be diluted to 56 per cent, while exposure to developed countries would rise to 28 per cent and it would fall to 16 per cent for high-risk regions.

The Nexen acquisition, if approved as expected by Nexen and CNOOC shareholders and regulators in China, Canada and the United States and completed this year, would boost CNOOC'S output next year by about 20 per cent and proved reserves by 30 per cent.

This would help CNOOC deliver on its target to raise output by an average 6 to 10 per cent a year between last year and 2015.

CNOOC has been struggling in the past 18 months to repeat the stellar average growth of 14.2 per cent achieved between 2001 and 2010 - among the highest in the oil and gas industry.

It saw output rise just 0.7 per cent last year, compared with its target of 8 to 12 per cent, after a major oil spill in northern China and the cancellation of an acquisition in Argentina. As the spill oilfield has yet to resume production, CNOOC has been looking at flat growth, or at best a 2.5 per cent rise, this year.

While the proposed acquisition of Nexen would provide a quick fix for near-term growth challenges, some analysts said it might come at too high a price. The US$27.50 that CNOOC offered for each Nexen share to take over the entire firm represents a 61 per cent premium to the market price.

CLSA head of Asian oil and gas research Simon Powell said it looked expensive given it represented US$20 per barrel of oil equivalent (boe) of Nexen's oil and gas reserves. The average cost of acquisition internationally was US$9 a barrel of proven oil reserves in 2010, according to a Sanford Bernstein report.

Gordon Kwan, head of energy research at Mirae Assets Securities, said while US$20 seemed steep, it was lower than CNOOC's own valuation of US$25 per boe of proven reserves.

According to the Sanford Bernstein report, there are economic reasons for mainland oil firms to buy overseas assets.

It said that because the average cost of finding a barrel of proven reserve on the mainland was US$17 in 2010, acquiring overseas reserves was actually cheaper than exploring and developing domestic fields, which cost US$9 a barrel.

This explains mainland firms' multibillion-dollar acquisitions in recent years, as does their mandate to enhance national energy security by gaining influence over overseas resources and hedge energy price risks.

Rival China Petrochemical - parent of listed China Petroleum & Chemical (Sinopec) - is the most aggressive among the three state-controlled oil and gas firms, splashing out more than US$30 billion in the decade to last year.

Being the world's second-largest oil refiner, it is short of oil production assets to hedge the risk of state fuel price controls that have resulted in huge refining losses.

China Petrochemical announced on Monday that it would pay US$1.5 billion for a 49 per cent stake in Canada-based Talisman Energy's British unit, gaining access to oil and natural gas fields in the North Sea.

Beveridge said the price was expensive as it was double the estimated value of its proven reserves.

Citi's head of Asia-Pacific investment and corporate banking, Farhan Faruqui, said he expected more big acquisitions from mainland firms seeking to globalise their operations. Citi advised CNOOC on the Nexen deal.

Additional reporting by George Chen