Sunday, December 9, 2012

What CNOOC (CEO) Nexen (NXY) Acquisition Means For Oil Sands (China oil companies production reserves offshore)

After months of waiting for the Canadian government to approve it, on December 8, 2012 China's national offshore oil corporation (nyse:ceo) completed a $15.1 billion all cash takeover of Canada's tenth largest oil company Nexen (tsx:nxy).  The deal is the largest foreign investment by any Chinese company ever and will undoubtedly be a confidence booster to Chinese firms looking to buy companies abroad after having been spurned by Unocal Corp in 2005 ($18.5 billion offer rejected) .  In order to get the Canadian government to approve the deal, CNOOC had to make a few concessions:  It agreed to an annual review of its operations, that Nexen Canadian operations employ more Canadian workers than Chinese, CNOOC has also said that it will consider listing on the Toronto Stock Exchange.  The stipulations are not new, the Canadian government has a similar arrangement with Rio Tinto Alcan.

Don't be fooled !  Chinese investment in Nexen doesn't necessarily indicate their interest in the oil sands.  Nexen only accounts for about 6% of oil sands production (including shale, Nexen produces 52 thousand bpd in Canada), in fact the majority of Nexen's production comes from outside of Canada in regions such as the North Sea, the Gulf of Mexico and offshore West Africa (African production down from 18th boe/d last quarter to nothing this quarter). 

Non-Canadian assets represent 70% of Nexen's total reserve base.  In fact, if CNOOC was only interested in the oil sands it would have made more sense for it to spend the money on MEG Energy, a company that it already has a 17% interest in;  MEG Energy has 2P reserves twice that of Nexen, they are however all in the form of heavy oil sands bitumen a form that at least some people in China still have questions about.  Nexen acquisition makes CNOOC one of only 15 companies operating in the oil sands.

Don't be fooled by the pricetag.  Prior to CNOOC's initial bid Nexen hadn't been worth more than $10 billion for at least two years, in fact $15.1 billion is 62% more than the company's market value at the time of the bid.  The company has vast reserves (over 2.3 billion boe in proved and probable reserves) but a lot of that oil is either in unstable regions (West Africa output of 18,000 bpd in 2Q2012 was down to nothing this quarter) or in undeveloped areas where the cost to produce a barrel of oil is relatively high.  But to a cash rich company like CNOOC the pricetag makes sense since funding for the undeveloped projects will no longer be an issue.  Owning Nexen makes sense because Nexen is already partnered with CNOOC at the Long Lake Oil Project where Nexen owns the 65% interest that CNOOC doesn't already have;  CNOOC acquired the initial 35% interest in November of last year when it bought OPTI Canada for $2.1 billion.  China is becoming increasingly dependent on foreign oil, by 2013 oil from outside the country will account for 60% of its needs.  At the same time, the USA is becoming less dependent on foreign oil (1st 10 months of 2012 net imports down to 7.7 million barrels from 12 million seven years ago), however it should be noted that since that time the United States consumption of oil has fallen (-3.8% since 2000) while China's has increased 22%.
Seraphim's Advice:  To Canadians who disapprove of the government's decision consider this, China accounts for only 2% of foreign investment into Canada.  China remains only a minor trading partner of Canada which shouldn't be considering that it is now the top trading partner to more countries than the United States (124 vs 76) and that trade with many of those countries including Australia relies on China's appetite for commodities, something that Canada has a lot of.  Also, Canadian companies have shown an interest in acquiring Chinese companies in the gold and banking and banking sectors;  If Canada blocked CNOOC's bid then China would likewise do the same to future bids by Canadian companies.  Investment from CNOOC also helps Alberta reach its goal of increasing oilsands output by 147% in 2025 (1.5m boepd  --> 3.7m).
This is a strong message to the US that Canada is broadening its trading field
American companies such as ExxonMobil ($2.6 billion takeover of Celtic Exploration last October, owns 70% of Imperial Oil) and ConocoPhillips (owns 50% of Cenovus Energy's Christina Lake) have always had free access to Canada's oil and Canada has grown reliant on that investment.  With US interest shifting away from the oil sands (keystone pipeline remains widely unpopular) Canada must find new sources of investment and CNOOC will provide (CNOOC capital investment was up 58% to ~$6.3 billion in the 9-month period, +46.7% to ~$2.4 billion in the 3-month period ended September 30, 2012 .  Without the keystone pipeline WCS Canadian oil will continue to be undervalued due to a glut of supply at refineries in the northern states.

What Nexen Gives CNOOC

  • most recent quarter:  daily gross production down -15.3% q2q to 180,500 bpd
  • 172,000 bpd production net of royalties (3Q2012)
  • undeveloped reserves that CNOOC has the financial backing to develop
  • a presence in the North Sea
  •  2.5 billion boe in 2P reserves (similar to Anadarko Petroleum)
  • more oil sands exposure.  Alberta is home to 60% of the world's oil that's not already owned by state oil companies.  If CNOOC's growth comes to rely on oil sands production then perhaps it will invest more in the region;  New government rules all but banning the outright takeover of Canadian companies means that CNOOC will have to take minority stakes in projects to do so which will speed up the development of the region's reserves (can't stress the importance of this, for example in the gold mining industry Canada's biggest gold project Kerr Sulpherets Mitchell hasn't produced an ounce yet because its owner Seabridge Gold can't raise the $4 billion needed to finance the project despite gold prices being through the roof).
other major deals by Chinese companies involving Canada's energy sector

Sinopec (SHI):  2012 July acquisition of 49% of Talisman Energy's North Sea assets (63,000 bpd).
- 2011 takeover of Daylight Energy Ltd. (DAYYF) for $2.2 billion
- 2010 $4.65 billion investment in Syncrude Canada

CNOOC (CEO):  2011 takeover of OPTI Canada for $2.1 billion

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