CNOOC Makes Nexen an Offer It Cannot Refuse
Despite the hefty premium paid, we think that CNOOC is getting a reasonable deal.
Nexen shareholders have reason to celebrate after CNOOC, Ltd. announced early Monday that it will acquire the firm for CAD 15.1 billion, or CAD 27.50 per common share (debt will remain outstanding). The offer price represents an astounding 61% premium from Friday's close of CAD 17.06 per share. We will be raising our fair value estimate for Nexen to CAD 25 per share, which considers CNOOC's offer price, risked 10% for potential regulatory challenges.
Despite the hefty premium paid, we think that CNOOC, Ltd. is getting a reasonable deal. We estimate the relevant transaction metrics at CAD 18 per barrel of proved reserves, and roughly 5 times our estimate of 2012 earnings before interest, depreciation and amortization, interest, taxes and exploration expense (EBITDAX), which would place Nexen's new valuation in line with the industry. Unfortunately, we think CNOOC, Ltd. could have likely gotten Nexen for a few dollars per share less than what it is paying--we doubt there was much interest for an outright acquisition from other firms.
We think regulatory reviews from Canadian officials will be routine. CNOOC, Ltd. had already acquired OPTI Canada, which held a 35% stake in Nexen's Long Lake oil sands project, and received regulatory approval in relatively short order. Of a greater challenge, we believe, will be what happens with U.K. officials and their concern over the Buzzard platform. Buzzard production makes up over 40% of BP's (BP) Forties Pipeline volumes and is a strong influence on the pricing of Brent Crude. Certainly the case could be made politically that Chinese influence on international oil prices could become excessive with the acquisition of Buzzard. We don't believe, however, this is a deal breaker as CNOOC, Ltd. could likely sell the platform to a western operator.
Chinese appetite for Canadian E&P's continues to be healthy. We expect further deals to continue as China seeks to secure additional access to energy resources, a critical component of the Chinese growth story. Since CNOOC, Ltd. has been acquiring firms in which it already has a stake, we think its next most likely target is MEG Energy (MEG), which has complementary oil sands assets, investments in pipelines and storage terminals, and a major shareholder (private equity firm Warburg Pincus, with a 23% interest) which we suspect will eventually need to liquidate its stake in the firm.
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Robert Bellinski, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.