China flexes muscles with Cnooc, Nexen deal
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SAN FRANCISCO (MarketWatch) -- When Cnooc Ltd. scored a deal to acquire Canada's Nexen Inc., it was one big leap for China's largest offshore oil and natural-gas producer, and one small step toward building a global empire to feed the Asian nation's voracious appetite for energy.
"China realizes that access to energy is power," said Phil Flynn, a senior energy analyst for Price Futures Group -- and Canada just might be the "new Middle East" as oil sands there, with new technology, may hold as much oil as Saudi Arabia.
China National Offshore Oil Corp.'s Cnooc Ltd. (CEO) (883) announced on Monday an agreement to acquire Nexen (NXY) (NXY) , an oil and natural-gas firm developing energy resources around the world, for US$15.1 billion in cash. Read more about the Cnooc, Nexen deal.
At more than $18 billion, including debt, the deal would be the biggest cross-border acquisition by a Chinese company on record, if completed, according to Dealogic. It would also be the 15th largest oil and gas merger and acquisition deal on record.
It would be the largest energy deal yet by a Chinese company, "but is by no means the first of its kind; it is just falling in line with a trend we have seen developing over the past few years," said Matt Smith, an analyst with Summit Energy in Louisville, Ky.
China is looking to obtain "a certain level of energy security going forward," he said, and it is investing in North America because the region has "led the way globally in terms of technology and innovation for the energy industry."
It likely plans to "learn these skills and take them back home," he said.
"China's appetite for commodities is somewhat insatiable, and this will likely only continue over the coming decades as it ramps up consumption of natural gas and becomes the largest oil-consuming nation," said Smith.
That will certainly have repercussions for the energy industry world-wide and present big political challenges, energy analysts said.
It is expected that Cnooc's deal with Nexen will be reviewed by the Committee on Foreign Investment in the U.S. as well as by Canada's securities regulators and courts. Read about New York Senator Charles Schumer's comments Friday on the deal.
Strategic buy
China has been building up its overseas acquisitions over the past four years on a gargantuan scale.
China's appetite for acquisitions increased after the global meltdown in 2007-2008, and with its stomach gurgling, "it threw its head to and fro looking for prey," said Seth Rabinowitz, who covers commodities as a partner at Silicon Associates.
Chinese companies have announced 1,418 overseas acquisitions valued at a total of about $235 billion since 2008, according to Dealogic.
The Cnooc news came the same day state-backed Chinese firm China Petroleum & Chemical Corp., a.k.a. Sinopec (338) , said it agreed to acquire a 49% stake in U.K. North Sea assets owned by Canada's
"China seeks resources wherever and from whomever it can strike a deal," said Byron King, editor of investment newsletter Outstanding Investments. Oil, liquefied natural gas, copper, rare earths, technology metals -- "China needs it all."
China is the world's third largest oil consumer, after the U.S. and European Union, and fifth biggest natural-gas consumer, based on 2011 estimates from the U.S. Central Intelligence Agency's World FactBook.
China's trend of overseas acquisitions is set to continue, "as China sees it as necessary to accommodate its massive and growing domestic energy needs," said Rabinowitz.
"While the reality is Nexen is small potatoes globally, China is making a strategic buy with this because it opens up what's been elusive to China thus far -- the Gulf of Mexico."
Cnooc's deal also follows the "Chinese pattern of acquiring technology with the assets," said James Williams, an energy economist at WTRG Economics.
"Nexen has expertise in offshore drilling, oil sands, mining in-situ bitumen production and shale gas," he said. "Strategically, it increases China's presence in South America, the Middle East (Yemen), North Sea, South America, and West Africa as well as Canada and the U.S. Gulf of Mexico."
Mac Elatab, partner at Timurid Advisors, a private investment company that invests in natural resource companies in Central Asia, said China is "extremely opportunistic."
"This is less of a new trend and more of the same," he said, detailing several billion-dollar energy deals Chinese firms have made, including Sinopec's $9 billion acquisition of Switzerland's Addax Petroleum Corp. in 2009.
Challenges
Even so, China's effort to acquire resource assets in foreign markets is not without significant challenges.
"The Chinese are more interested in increasing production rather than giving value to shareholders, so takeovers might be difficult," said William Gamble, author of "Investing in Emerging Markets: Rules of the Game." "Many governments do not look favorably on these deals."
There are also other political concerns involved.
"The Canadian government, led by their prime minister, Stephen Harper, has softened their stance on China's human rights record by giving a silent nod of approval" to Cnooc's bid for Nexen," said Bob van der Valk, a petroleum-industry analyst based in Terry, Mont.
The deal is still subject to government and regulatory approvals. Read about the approval process.
In 2005, Cnooc withdrew an $18.5 billion takeover bid for Unocal Corp., citing difficulties in the political environment. Read about Cnooc's 2005 bid for Unocal.
"U.S. governmental approval on the deal became a heated political debate in Washington," said van der Valk, who's a retired Unocal employee. "
Cnooc's management "failed to anticipate and compensate for predictable political and social resistance," said Rabinowitz. "The Cnooc-Unocal failure was a punch in the stomach, and [the] Chinese saw stars for a while."
Van der Valk expects Canada to have a similar type of public reaction to Cnooc's latest deal, with "political parties fighting it out on whether to allow the Chinese to own part of their sources of energy troves."
Good and bad
Overall, Cnooc's deal with Nexen offers both advantages as well as disadvantages for the oil market.
"We have the possibility of having the Chinese state-owned oil company become another hostile entity controlling U.S. energy prices if this purchase is allowed to go forward by the Canadian government," said van der Valk, with much of Canada's crude oil destined for export to the U.S.
There's also a "real possibility of having China 'drain Canada dry' of crude oil," he said.
James Cerna, chief executive officer of Houston-based
The Chinese have made a good investment and will be looking for a good return on the capital invested, but oil isn't likely going to flow to China, he said.
In 2010, Cnooc announced a deal with
Cerna said oil from South Texas won't be exported to China. "That additional oil found will be used in the U.S. to increase domestic production. The same goes for the offshore development in the Gulf by Nexen."
China is "providing much needed capital that's not readily available in the U.S., which is helping to develop these plays," he said.
Given that, Cerna believes the Cnooc/Nexen deal will "most likely help raise total world oil production and may have a very slight effect on world oil prices."
China's interest in large, strategic purchases of natural resource companies is also "encouraging to the market," given continuing concerns over "China's slowing growth and burgeoning supply in North America," said Timurid Advisors's Elatab.
Still, "predicting the eventual global impact of China on global energy markets is like shooting a bouncing target while standing on a ball and eating an ice cream cone," said Silicon Associates's Rabinowitz.
"So we wait and watch and forecast," he said, but we only have one prediction of how much of an impact these acquisitions will have on energy markets world-wide: a lot."
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