Calgary-based oil producer Nexen approved a takeover bid of $15.1 billion U.S. by Chinese state-owned oil producer CNOOC Ltd. The price per share would be $27.50 a full two thirds higher than the average price over the last twenty days.
Nexen is the 12th largest energy producer in Canada with an output of about 213,000 a barrel oil equivalent per day. Nevertheless the company has not been doing that well of late. The company has a global presence. North Sea production has just been hit by a new UK tax. Drilling in the Gulf of Mexico was delayed by the huge BP oil leak. It was also forced to abandon a project in Yemen. Even in Canada at Long Lake planned output has not been reached.
In the second quarter net income for Nexen fell to only $109 million, a decline larger than analysts predicted. The company earned just 20 cents a share in the second quarter down form a year earlier. Never mind the gloom, China needs oil and is willing to pay a premium price to guarantee a secure source of supplies.
The troubled Long Lake project provided China the first stage of the later bid. Back in November of last year CNOOC bought OPTI Canada Inc. a company that held a 35 per cent stake in the Long Lake project. CNOOC has already spent 2.8 billion in Canada.
China has been moving cautiously with takeovers after a failed takeover bid for UNOCAL corporation in 2005. No doubt there will be considerable debate about the Nexen takeover. The deal will have to pass through a process of evaluation under Canadian foreign ownership rules. CNOOC said it would retain the existing staff and management of Nexen and also make Calgary the headquarters for North and Central American operations. The company also promised it would list shares on the TSX and fund oll sands research at Canadian universities. All of these moves may help the company gain approval for the takeover.
Already a number of Asian companies have invested in Canadian energy projects. Athabasca Oil Sands Corp. earlier this year sold a 40 per cent interest in two projects to PetroChina Co. Last fall Sinopec bought Daylight Energy Ltd. for a price tag of $2.2 billion U.S. The giant Malaysian firm Petronas bought Progress Energy Resources for $5.5 billion in June of this year. The Canadian Prime Minister Stephen Harper is very much pro-business.
Harper has often been a critic of China but of late he seems to be interested in tapping into Asian markets and pools of Asian capital to help develop Canadian resources. Canada has traditionally been a supplier first and foremost for the U.S. market. NAFTA cemented this relationship. However Harper seems to have realized that diversifying markets and sources of investment would be beneficial for Canada. The Nexen deal will be a test of these policies.
The Nexen takeover must be approved by two thirds of shareholders. It is subject to an almost half a million dollar break fee. Not all foreign takeovers are approved.
When BHP Billiton of Australia tried a hostile takeover of Saskatchewan-based Potash Corp the deal was eventually blocked by considerable resistance from Potash management and the Saskatchewan premier. Some corporations are supposedly strategic assets for Canada. Perhaps Nexen will be another strategic asset although the government has not yet defined what the term means.
Harper is likely to receive the most pressure to block the bid from the U.S. The U.S. will not look kindly on its Asian competitor securing supplies of scarce resources from its northern neighbor. The question is whether business prevails over politics or perhaps whose business interests prevail.