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A lush, new bid for Nexen Inc. puts a radically higher price tag on Canadian energy assets, increasing speculation that a flurry of merger activity is in the offing.

The $27.50-a-share, all-cash offer from CNOOC Ltd. unveiled on Monday represents a 61-per-cent premium to Nexen's closing price Friday, an indication CNOOC management believed the Canadian oil producer's stock was massively undervalued.

The deal spotlights the depressed valuation levels in the sector, which is down 12.7 per cent from the start of the year.

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Analysts and investors are already scrambling to spotlight other potential takeover targets.

The bid for Nexen "illustrates the deep value sitting within the Canadian energy space," Credit Suisse analyst Brian Dutton argues.

Investors appeared to agree. Energy stocks initially lost ground Monday but strengthened during the session, spurred by speculation on other possible deals.

The energy index finished up 1.6 per cent on a day when oil prices and the broad market fell.

Analysts said the $15-billion bid by CNOOC is a tangible sign that the Chinese company believes stock prices in the sector are unlikely to fall much further.

Bay Street's most widely used valuation method for energy stocks is enterprise value to debt-adjusted cash flow (EV/DACF), which compares a company's total market value (market capitalization plus net debt) to predicted cash flow, adjusted for the firm's debt.

At $27.50, CNOOC valued Nexen at 5.8 times 2013 DACF – "a fair price," according to Phil Skolnick, an analyst with Canaccord Genuity Corp.

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Applying the 5.8 times multiple to other companies highlights their potential. Mr. Skolnick estimates that Talisman Energy Inc. would trade 57 per cent higher with a 5.8 times multiple, while Canadian Natural Resources stock would climb 20 per cent.

Talisman is at the top of many analysts' lists of possible takeover targets. It made news Monday by agreeing to sell a 49-per-cent stake in its British operations to China Petrochemical Corp. for $1.5-billion (U.S.).

With a market cap of $12-billion, Talisman is comparable in size to Nexen and owns a similar portfolio of international assets, although its lack of oil sands properties would make it less attractive to global energy giants looking to expand holdings in Alberta.

In the wake of CNOOC's massive bid, analysts expect other large global players to begin assessing potential acquisitions.

"The appetite for undervalued companies remains quite strong," says Ryan Savage of GMP Capital Trust.

Among the biggest advancers Monday was MEG Energy Corp., already 15 per cent owned by CNOOC, which gained nearly 3 per cent on takeover speculation, although the willingness of management to sell at current levels is in question.

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Send your questions about CNOOC's bid for Nexen to businesscommunity@globeandmail.com, along with your name, age, city and province. The Globe will pose the best questions to our panel of experts and publish their responses.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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