Canada is at risk of slapping a national discount on its resources sector. Investors reckon there’s a roughly one-in-four chance that the country’s politicians will block a $15.1-billion offer by China’s CNOOC Ltd. for Calgary-based energy company Nexen Inc. Takeovers by state-owned companies raise tricky questions. But hoisting the national flag over a company of little strategic importance risks further alienating outside investors.
When the state-owned oil giant first unveiled its bid on July 23, investors expected little Canadian resistance. Since then, however, doubts have crept in. Nexen shares are now hovering about 10 per cent below CNOOC’s cash offer of $27.50. Though that’s still well above the pre-bid level of $17.30 to which Nexen shares would probably return if the deal was blocked, the market is no longer taking approval for granted.
Part of the anxiety stems from Prime Minister Stephen Harper’s insistence that market access should run both ways. Bank of Nova Scotia, for example, has been waiting a year for official go-ahead to purchase a minority stake in China’s Bank of Guangzhou. Cabinet members – and the country’s spy agency – have also expressed concerns about selling to state-owned firms that might harbour sinister political motives. And Canada has formerly spurned foreign buyers: Two years ago, it blocked BHP Billiton’s $39-billion takeover of Potash Corp. of Saskatchewan, the world’s largest fertilizer company.
But buying Nexen hardly gives China control of Canada’s energy output. The firm is the nation’s 24th-largest pumper of oil, according to Macquarie, and about three-quarters of Nexen’s resources are outside Canada. Blocking the takeover would also raise tricky policy questions: Is Canada singling out Chinese buyers, or would it also object to the trio of Indian state companies that recently lodged a $5-billion bid for Canadian oil sands assets currently owned by ConocoPhillips?
Hoisting the flag over Nexen would be bad news for investors in other Canadian mid-sized drillers – including Talisman Energy and Celtic Exploration – that are seen as potential foreign targets. Canada has said it needs $640-billion over the coming decade to fully exploit its energy reserves. Rebuffing its most enthusiastic investor seems especially foolish.