China's CNOOC offers $15B for Calgary oil firm Nexen

Calgary-based oil and gas firm Nexen Inc. has agreed to be acquired by China National Offshore Oil Company in a $15.1 billion US cash deal.

State-owned CNOOC Ltd. will pay $27.50 per Nexen share. That price makes the deal the largest foreign transaction that Beijing has ever attempted.

The agreement is a 61 per cent premium on the closing price of its shares on Friday on the Toronto Stock Exchange.

"This transaction will allow for significant investment in our business and opens the door to new opportunities for our employees," Nexen's CEO Kevin Reinhart said in a release.

As part of the transaction, CNOOC said it plans to list its shares on the TSX. It also intends to have a head office in Calgary to oversee its North and Central American operations.

Although Nexen's board is recommending the deal, the takeover must be approved by shareholders and various regulatory bodies. In particular, the deal will require the federal government's sign-off in Ottawa under the Investment Canada Act, which requires some foreign takeovers of Canadian companies to pass the "net benefit test" of being deemed a useful contribution to Canada's economy.

Reinhart expressed confidence that all regulatory concerns can and will be addressed.

"There was some work in preparing for conversations with government, but that is premature to speak about," Reinhart said. "We will work together."

After the deal was announced, Industry Minister Christian Paradis announced that his office would indeed be reviewing the terms of the transaction. He said the Competition Bureau will also have a say.

"Under the Competition Act, the Bureau has a mandate to review mergers to determine whether they are likely to result in a substantial lessening or prevention of competition," Paradis said in a statement.

'The political rhetoric is going to get cranked up here' —Sam La Bell of Veritas Research

Ottawa has moved in the past to strike down foreign takeovers, most recently to stop Austrialian miner BHP Billiton Ltd.'s $39-billion bid for Potash Corp. of Saskatchewan in 2009.

Another cabinet minister says that shouldn't be taken as a sign that Canada isn't open for business, internationally.

"We want to make sure that Canada is a place that foreign direct investment is attracted to," International Trade Minister Ed Fast said Monday. "We want to be one of the most attractive investment environments in the world because foreign investment does drive economic growth within Canada, and it does ensure our long-term prosperity."

"But we also have some pretty rigorous mechanisms in place to review investments," Fast said.

Other governments may also be involved, since Nexen has extensive assets in Nigeria, Colombia, Yemen,  the North Sea off the coast of Britain and the Gulf of Mexico.

If all hurdles can be overcome, the deal is expected to close in the fourth quarter of 2012.

Faced challenges

Nexen has faced numerous challenges over the past few years, most recently the troubled launch of its Long Lake oilsands project in northern Alberta. The project has yet to come close to its design capacity of 72,000 barrels of bitumen per day due to a number of operational glitches.

As it stands, Nexen is a sizable international conventional oil company. Only 28 per cent of Nexen's output — and just 11 per cent of its revenue— comes from its Canadian operations.

Indeed, Nexen's non-Canadian assets shouldn't be dismissed, Bob Shultz of the Haskayne School of Business at the University of Calgary said Monday. "The whole idea is to get assets from offshore to provide the oil that China needs to grow," he said in an interview with CBC News.

"I think Industry Canada is going to let this one go," he said.

Nexen currently produces 207,000 barrels of oil equivalent per day. But the company has about 5.6 billion barrels of oil equivalent when its oilsands holdings are considered.

When the TSX closed on Monday, shares of the company were up $9.06 at $26.35, just shy of the takeover offer price and as such a slight indication there's investor doubt the deal with go through.

Many on Bay Street are expecting Ottawa to be more amenable to this takeover than they have been to others. "A lot of the assets are international," a detail in the deal's favour, senior portfolio manager Laura Lau of the Brompton Group says. "They have been approving all of these international companies to come into the oilsands [because] they are very capital intensive."

"It’s a good deal for Nexen shareholders, I don’t believe they’d get a higher bid," Lau said.

CNOOC already has a toehold in the oilsands, through the company's $2.1 billion deal to buy OPTI Canada out of creditor protection last year. OPTI owned the other third of the Long Lake oilsands project that Nexen didn't.

That previous partnership with Nexen makes CNOOC the optimal buyer for the company, Sam La Bell of Toronto-based Veritas investment research says.

"CNOOC is the natural buyer," he said. "We view this as full value for the deal." He too, suspects Ottawa will likely approve the takeover

"Definitely the political rhetoric is going to get cranked up here. The political angle is hard to evaluate," he said, "It’s a great fit with CNOOC and their overseas assets.

"I don’t see that as being a huge risk," he said.

The Chinese company has made several other investments in Canadian companies over the past seven years, including buying stakes in MEG Energy Inc. and a 60-per cent investment in Northern Cross (Yukon) Ltd.

CNOOC noted in a release Monday that it has invested $2.8 billion in various Canadian projects since 2005.

On Friday, shares of Nexen closed down 15 cents to $17.29 on the Toronto Stock Exchange.

CNOOC also noted that it intends to keep Nexen's existing management and staff, although Reinhart was coy when pressed on the issue at a press conference Monday morning.

In January, Nexen announced a major management shakeup, with Marvin Romanow leaving his post as CEO and Gary Nieuwenburg stepping down as the executive vice-president of the company's Canadian operations.

Reinhart was previously the company's chief financial officer.