In offering to buy United States oil company Unocal Corp for US$67 per share, CNOOC has shown it is prepared to pay elevated prices for international oil and gas reserves.
However, paying a high price is not the same as paying too much. Observers who accuse the Chinese company of overpaying on a simple comparison with Chevron Corp's rival bid of US$65 a share are using the wrong benchmark to evaluate CNOOC's offer.
Critics note CNOOC will have to pay a US$500 million penalty for breaking Chevron's agreed bid and will not reap any of the US$350 million a year in cost savings that Chevron can expect.
But the Chinese company stands to make some powerful gains from the acquisition.
With the equivalent of 1.75 billion barrels of oil in proven reserves, mostly in Asia, buying Unocal presents a rare opportunity for CNOOC to boost its reserves by 80 per cent in the region where it most wants to expand. Given that it would struggle to make the same headway through internal growth or a string of smaller deals, the advantage is well worth a sizeable premium.
Factoring in US$1.1 billion in net debt, CNOOC's offer places an enterprise value of US$19.6 billion on Unocal. That is high compared with CNOOC's market capitalisation of US$22.5 billion, and other companies in CNOOC's position would find it tough to finance such a big acquisition.
But CNOOC's state-owned parent has deep pockets and good friends at China's state banks, which has allowed it to put together a favourable US$16 billion borrowing package for its all-cash offer.