China National Offshore Oil Corp. Crossed The Biggest Hurdle to Its $15.1 Billion Bid

With approval from the Canadian government granted on Friday, China National Offshore Oil Corp. has crossed the biggest hurdle to its $15.1 billion takeover bid for Nexen and the deal should close by the end of the year, analysts said in research note on Monday.

CNOOC will now need approvals from the US and UK governments, but Canada was the key risk as Nexen's assets in the US are not material and the British government is investor-friendly, Macquarie Research analysts James Hubbard and Aditya Suresh said in the note.

"The US approval process may well prove noisy and emotive in the press but ultimately the US assets account for only 5% of our Nexen valuation," they said.

Fei Wu at BOCOM International said Nexen's US assets in the Gulf of Mexico accounts for only 3.4% of its proved reserves and 7.1% of current production.

CNOOC and Nexen refiled for US approval to the Committee on Foreign Investment on November 24, meaning the next potential approval date could be December 24.

In addition to its troubled Long Lake oil sands project in Alberta and major shale gas interests in British Columbia, Nexen has operations in the Gulf of Mexico, the North Sea and offshore West Africa.

Even if CNOOC was forced to divest its Gulf of Mexico assets, damage would be limited, Wu said in a research note on Monday, estimating CNOOC's proved reserves addition would fall from 28% to 27% while production would fall by four percentage points to between 17% and 20% growth in projected output this year.

The Canadian government announced late Friday approval of CNOOC's takeover bid, along with Malaysian state company Petronas' $6.06 billion acquisition of Progress Energy Resources. Both deals were announced in the second quarter of this year.

Canadian Prime Minister Stephen Harper said any future bids for foreign state-control of the oil sands would only be granted in "exceptional circumstances."

"Although Canada said that further such takeovers will not likely gain approval, we believe the country will not completely close the door to beneficial foreign investments as the capex required to commercialize oil sands continues to surprise on the upside," Gordon Kwan, head of energy research at Mirae Asset Management, said in a note on Monday.

"We believe the government officials' statements were made to appease the many politicians who had voiced concerns recently about the CNOOC and Petronas (Malaysia) deals," the note added.

Kwan said approval for both deals will lead to more foreign takeover proposals for North American assets, sustaining the energy mergers and acquisitions boom in the long term.

In a statement to the Toronto Stock Exchange on Friday night, Nexen said no further approvals are required in Canada.

"This is an important milestone in the process and confirms our belief that this transaction provides a number of significant benefits to Canada and to Nexen," said Kevin Reinhart, Nexen's interim president and CEO. "We remain focused on working with CNOOC to bring this transaction to a close."

The European Commission also approved the deal on Friday, shortly before Canada announced its decision.

In a statement on its website on Saturday, CNOOC Chairman Wang Yilin said Industry Canada's approval signals that the deal will be of great value and bring long-term economic benefit to Canada, Alberta and Calgary.

The company said that as part of its commitment to the government, it agreed to establish its North American headquarters in Calgary to oversee assets worth about $8 billion, retain Nexen's management and employees, invest significant funds for the long-term development of Canada's oil and gas resources, list its shares on the Toronto Stock Exchange, continue to contribute to research in oil sands at the University of Alberta and submit an annual social responsibility report to Industry Canada.

These were conditions that CNOOC had already said it would undertake when the deal for Nexen was first announced in July.

With the Nexen acquisition and its own organic growth, CNOOC's estimated production is likely to rise by 33%, while earnings should see a 19% boost in 2013 Credit Suisse said on Monday. In addition, the company would gain expertise from Nexen's employees skilled in shale gas and deepwater exploration, which could augment its domestic plays in China, Credit Suisse said.

Progress and Petronas said in a joint statement on Sunday that the approval marked a vital step in their plans to develop an LNG export business in British Columbia.

They said growth plans include three major investment components: the Pacific Northwest LNG project involves the processing of 2 Bcf/d of LNG for export, continued upstream development of natural gas in the Montney region and the eventual installation of a pipeline to export gas from the fields to the LNG export facility.

All approvals for Petronas-Progress have now been obtained and the deal is scheduled to be completed on December 12, the statement said.