A large but troubled oil sands project will fall into Chinese hands after CNOOC Ltd. agreed to pay $15.1-billion (U.S.) for Nexen Inc., in a takeover that signals even the most important members in the Canadian oil patch are vulnerable.
Never before has a foreign firm paid so much for a Canadian energy company – and never before has a Chinese firm paid so much for an overseas asset.
The Nexen deal is the second-biggest energy deal Canada has ever seen, the sixth-largest takeover in the country's history and the most significant step yet by an Asian company into Canada's oil sands.
Its sheer scale is a clear sign of the tremendous opportunity that Asian buyers continue to see beneath the forest and muskeg of northeastern Alberta, where Nexen's $6-billion Long Lake project has struggled for years to pump the oil it was designed to produce.
Eight years after construction began, Long Lake is still at less than half its potential capacity, after Nexen encountered problems with underground geology that was less solid than expected.
CNOOC, however, believes those problems are technical glitches that can be solved.
The most important consideration for the firm, China's largest offshore oil producer, is the massive reserves that stretch out around Long Lake. In fact, the quantity of oil Nexen possesses on its land – some 900 million barrels in proven reserves, and up to 5.6 billion barrels in less-certain contingent resources – was among the first things CNOOC pointed to in discussing the deal, which was announced Monday.
Nexen has "very good quality reserves with a high potential," CNOOC chief executive officer Li Fanrong said in an interview in Calgary.
Only 28 per cent of Nexen's output comes from Canada, and its North Sea and Gulf of Mexico assets provide an entry for CNOOC into those parts of the world. But the company's oil sands, where much of its reserves reside, were a central feature of the deal.
Matching that volume of oil with the state-controlled Chinese firm's deep pockets will yield a "long-term, very substantial capital investment" for CNOOC, Mr. Li said.
The Nexen takeover comes amid a series of investments that have seen cash-rich Asian companies pursue assets in some of Canada's most important energy geographies, in the oil sands and the rich natural gas shale fields of northeastern British Columbia. But the size of the Nexen deal points to an increasing assertiveness by Chinese firms that suggests some of the largest firms in the Canadian energy constellation are now in play.
If CNOOC is successful, much of the oil patch is now "pretty much wide open," said CIBC analyst Andrew Potter, who named Talisman Energy Inc. and Canadian Oil Sands Ltd. as similarly sized companies that could be considered buyout targets. But, he cautioned, "there are limits to how far this can go," with names like Suncor Energy Inc., Canadian Natural Resources Ltd., and Cenovus Energy Inc. "probably off limits."
For Nexen shareholders, the offer provides a 61-per-cent premium to the company's Friday close, and a price not seen for Nexen since 2008.
"I don't think there's a single shareholder in the galaxy that would vote against this thing," said David Taylor, president of Taylor Asset Management Inc. in Toronto. "I would have taken $20."
The substantial premium is itself a window into how overseas firms view potential investments. Markets had severely discounted Nexen because of operating glitches, partly caused by underground "thief" zones that stole away heat needed to melt out the oil, making production difficult. Nexen has begun drilling new wells in different areas of its land.
"Going back seven years, this company is just stumble after stumble in terms of their ability to execute," said Norm MacDonald, a Trimark fund manager.
CNOOC, however, saw it differently: "What we pay is the fair reflection of Nexen's fundamentals," Mr. Li said. Analysts had pegged the company's net asset value in the mid-$20s per share, near what CNOOC is prepared to pay. It was trading in the mid-teens.
The CNOOC deal marks the end of a three-year search that saw the Chinese firm scour Canada and the U.S. for a large energy acquisition. During that time, it developed an increasingly close relationship with Nexen, beginning with its acquisition of OPTI Canada Inc., which held a 35-per-cent stake in Long Lake, a deal it followed with a Nexen joint venture to explore for oil in the Gulf of Mexico.
The initial OPTI deal, which saw CNOOC technical experts spend roughly half-a-year scrutinizing the project's viability, was key in making the firm comfortable with Nexen, sources familiar with the deal said. Then it looked at the numbers, "and if you believe in Long Lake, Nexen is really cheap," one source said.
It didn't hurt that Nexen has pursued plans to export both oil and gas to Pacific markets – through new West Coast oil pipelines, as well as a potential LNG terminal investment with Nexen partner Inpex Corp. – and according to a source familiar with Chinese plans, the "repatriation" of barrels is a top priority.
The pursuit of Chinese investment by top Canadian political figures helped, too.
"We love Canada," Mr. Li said. "And the reason we love it is because Canada welcomes foreign investment."
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