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Chairman of CNOOC Ltd. Wang Yilin, speaks at the company's interim result announcement in Hong Kong, Tuesday Aug. 21, 2012. CNOOC Ltd., one of China's three major state-owned oil producers, said Tuesday that first-half profit fell 19 per cent as it grappled with rising costs.

Kin Cheung/The Associated Press

China's third-largest oil company has slashed its dividend after a stretch of soggy profits in order to save cash as it prepares for its $15.1-billion (U.S.) takeover of Calgary-based Nexen Inc.

CNOOC Ltd.'s profit in the first six months of the year dropped by 19 per cent, prompting the company to cut its dividend Tuesday by 40 per cent. This comes as the Canadian government reviews the proposed takeover, which Ottawa must deem beneficial for the country in order for the deal to proceed. CNOOC said its production was hurt following an oil spill at its Penglai oil fields, and a Chinese resource tax that ate into its profit.

While CNOOC's decision to slash its dividend is a setback for its public shareholders, the move highlights the company's resolve to make the Nexen deal work. CNOOC will need cash not just to fund the transaction, but to invest in Nexen's properties, such as the struggling Long Lake oil sands project. Nexen's assets will give CNOOC a dramatic makeover, boosting the Chinese company's nine years' worth of reserves by 30 per cent and production by 20 per cent.

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"In consideration of the capital requirements of the Nexen transaction and to maintain financial flexibility and support the company's long-term growth, [CNOOC's] board of directors" decided to cut its dividend, the state-owned company said in a statement released in Hong Kong. Wang Yilin, CNOOC's chairman, told reporters the company does not plan to sell any of Nexen's assets after the takeover.

CNOOC's financial pinch, however, may not be enough to give Ottawa pause as it considers whether to block the Nexen takeover. Nexen's assets are expected to help the company bounce back, rather than drag on CNOOC's balance sheet. Further, the dividend cut reflects a corporate decision-making style common in North America, one expert said, and should not be held against the Chinese company.

"I don't think in the long run this will affect its ability to finance and work with Nexen," said Wenran Jiang, a special adviser to Alberta's department of energy on Asian market diversification. "This is a CNOOC operational issue."

Oil production out of CNOOC's Penglai oil field hit 72 million barrels, down 4 million barrels from a year earlier. CNOOC said this was the primary reason its overall production dropped by 4.6 per cent year-over-year.

"Poor production growth and softer crude prices certainly won't help lift CNOOC's profit much," said Simon Powell, the Hong Kong-based head of Asian oil and gas research at CLSA Ltd. "CNOOC may still struggle to maintain production growth for the second half, depending on when the Penglai production may resume, but its 2013 production will improve considerably if the Nexen deal goes through."

Governments, including those in Ottawa, Washington and Beijing, must approve the deal. CNOOC plans to list its shares available to the public on the Toronto Stock Exchange should it be allowed to buy Calgary-based Nexen.

With files from Reuters and Bloomberg News

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