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Phantom fears surround China’s Nexen deal

The headquarters of China National Offshore Oil Corp. in Beijing.


At first blush, CNOOC Ltd.'s $15.1-billion bid for Nexen Inc. seemed like a sign that China is ready to go on a buying spree in Canada's oil patch.

But on a closer look that seems far from certain. If Beijing thinks Nexen will open the door to a rash of big North American energy acquisitions by its state-controlled enterprises, it may want to think again.

For starters, Canada could still block the Nexen deal – China's biggest ever foreign takeover bid. The proposed deal needs to be approved by quasi-independent competition authorities and the government itself, which must decide whether it provides a "net benefit" to Canada.

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After the Nexen deal runs that gauntlet, it may be nearly impossible to navigate another mega-deal through Ottawa any time soon, as Canada weighs just how much foreign investment is too much.

"I suspect that there probably aren't going to be a whole string of copycat deals," said a source familiar with the CNOOC-Nexen deal. "I don't believe this means Canada Inc. is for sale."

The bid for Nexen, Canada's No. 8 energy company, comes just weeks after Malaysia's state-owned Petronas put in a bid for Progress Energy Resources Corp. Petronas raised its offer for the gas producer by 8 per cent to $5.2-billion (Canadian) on Friday after an unnamed suitor presented a rival bid.

"As much as I think there's going to be more M&A, I don't necessarily think that the flood gates are going to open up right away," said CIBC World Markets analyst Andrew Potter.

"We're not necessarily saying it's all going to happen next month. Buyers will sit back and see how the politics unfold."

In a second potential obstacle, Washington will review whether Chinese ownership of Nexen's Gulf of Mexico assets poses any national security issues.

The U.S. reservations are tinged with politics ahead of the Nov. 6 presidential elections, and Republican energy boosters don't like the idea of CNOOC scooping up North American oil resources. Some see the bid as another argument that the United States should push ahead with approvals for the Keystone pipeline that would carry more Canadian crude to U.S. markets.

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At the same time, Senator Charles Schumer of New York, a powerful Democrat who has criticized China for its trade and currency policies, wants the Treasury Department to block the bid until Beijing provides what he considers to be fair access to the Chinese market for U.S. investors.

To be sure, CNOOC has carefully applied lessons learned from the politically charged failure of its 2005 attempt to buy California-based Unocal Corp. It designed its Nexen bid to avoid upsetting Canadian sensitivities over growing Chinese ambitions.

State-controlled CNOOC has offered a generous premium for Nexen, a company with limited assets within Canada itself and a range of foreign activities. It said it would preserve jobs, list its shares in Canada and make Calgary – the Canadian energy capital – the headquarters for its North and Central American operations.

Despite those commitments, the Canadian government has warned investors against assuming approval is a sure thing.

Even so, Canadian Prime Minister Stephen Harper and Alberta, the province where most oil sands projects are located, have spent months wooing investment from China.

The Asian giant has emerged as the most important new customer for booming Canadian oil sands production as the industry seeks to reduce its reliance on sales to the United States.

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"I think whenever you have the head of the country and the head of the province where the resource resides telegraphing that they are open to Chinese investments that certainly doesn't hurt," said a source, who has worked on a number of such cross-border transactions.

But even if CNOOC wins all the approvals it needs, the wave of foreign takeovers in Canada that some fear might not materialize because there are only a handful of other large domestic companies that fit the bill. Talisman Energy Inc., Canada's No. 10 energy company, likely tops the list.

Talisman and Nexen share many of the attributes that Chinese buyers want: gas-rich shale acreage in western Canada, extensive oil exploration and production projects in some of the world's hottest regions, and the lack of a major shareholder who might seek to block a deal.

A sharp decline in both share prices over the past year brought their price-to-cash-flow ratio to a paltry three times, when some higher-flying competitors were above eight times.

On the day CNOOC uncorked its deal with Nexen, Talisman said it had sold a 49-per-cent stake in its North Sea operations to Sinopec, another Chinese state-owned entity, for $1.5-billion.

Like Nexen, the company has assets and partnerships around the world, while Talisman also has sizable and growing oil and gas holdings in China's southeast Asian backyard.

"Talisman remains the least expensive name in the space by a margin and has a relatively fragmented portfolio of assets," said TD analyst Menno Hulshof in a note to clients. "Although, unlike Nexen, it lacks an obvious natural buyer."

Talisman spokeswoman Phoebe Buckland said the company is not looking to be acquired, citing the North Sea sale – a move CEO John Manzoni signalled at the start of the year – as one example of how the company is delivering on its plans.

"John has said you can't build a business looking over your shoulder, and we're looking to build shareholder value as Talisman Energy with the asset base we currently have," she said, but added the company cannot control what others might do.

Analysts see Canadian Oil Sands Ltd., whose sole producing asset is a 37-per-cent stake in Syncrude Canada in the oil-rich tar sands of northern Alberta, as another possible target. But Chinese companies will have a combined 16-per-cent interest in Syncrude if the bid for Nexen succeeds. Further Chinese involvement could raise competitive concerns.

Another name that may attract interest is Encana, Canada's biggest gas producer. It has been under pressure from decade-low natural gas prices and other issues and its stock is down 28 per cent in the past year.

That could tempt a bidder with deep pockets and a long-term view that gas prices will eventually recover, making Encana's vast shale gas holdings more valuable.

But Encana chief executive Randy Eresman said he believes CNOOC's bid reflects a specific play for Nexen assets rather than a start of an open season on Canadian energy companies.

"I always feel that the company is at risk of being acquired," Mr. Eresman said in an interview. "And the question has been asked when our share price is low and it's also been asked when the share price is high. Historically there seems to be more transactions done in a higher commodity price environment than a low commodity prices environment."

A bid for Encana could be easier said than done, as its assets span Western Canada and are located in nearly all the most gas- and gas liquids-rich geological plays, which could make it a national jewel in the eyes of the government.

"I think you still have that group of untouchable Canadian companies that I don't think Investment Canada would approve a Chinese entity taking over," said one source, citing Encana an example.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More


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