Canada has given its approval to takeover bids of its firms by Asian energy giants China's CNOOC (CEO) and Malaysia's Petronas. CNOOC will be taking over Nexen Inc (NXY) for $15.1 billion, while Petroliam Nasional Bhd (Petronas) will assume the control of Progress Energy Resources Corp for $5.2 billion. In an apparent tit-for-tat move, China also gave approval for Swiss based Glencore International Plc to acquire the Canadian firm Viterra Inc for $6 billion. Viterra has a canola crushing plant in China, and therefore the deal needed approval from Chinese regulators.
CNOOC is the third of the three large Chinese oil companies. Its $15 billion acquisition will be the biggest ever by any Chinese firm of a foreign company. Nexen is the owner of Canada's largest oil sands field and has significant operations in the U.K. North Sea. CNOOC currently has a 35% stake in Nexen's Long Lake oil sands facility near Fort McMurray, Alberta. Around 8% of Nexen's total production comes from U.S. Gulf of Mexico. Nexen also has a 20% stake in Usan project in offshore Nigeria, which is operated by Total S.A (TOT). Less than a month ago, Total sold its $2.5 billion stake in Usan to China's biggest refiner Sinopec (SNP).
Meanwhile, Canada is aiming to become one of the leading energy exporters of the world. Prime Minister Stephen Harper visited China a few months ago in an attempt to show his support for the Chinese investment in the Canadian economy, which is considered vital for the country to achieve its global energy ambitions. The country's exports contribute one-third to the economic output, while almost a quarter of the total exports are energy products. Harper also wants to diversify the nation's energy exports that are currently focused on the U.S. As a general rule, the Canadian government will not go for a controlling stake in their oil sands projects except under "exceptional circumstances".
Since Nexen has significant operations in Europe and the U.S. as well, the deal also requires the approval from EU and U.S. regulators. CNOOC has revealed that the E.U. has also given its nod, but the Committee on Foreign Investment in the U.S has so far remained silent. That committee, chaired by Treasury Secretary Tim Geithner, as such is not directly seen as a political entity, but nothing in Washington D.C. is immune to politics.
Unlike CNOOC or Sinopec, Petronas is an LNG behemoth that is the owner of one of the world's biggest LNG producing facilites at Sarawak, Malaysia, while its subsidiary MISC Berhad is the owner and operator of world's biggest LNG fleet. Following the approval, Petronas now plans to construct a ~$10 billion LNG export facility along the coast of British Columbia. The company has privately held and is wholly owned by the government of Malaysia.
Due to intensive regulatory oversight, the Chinese oil companies have preferred oil investments in Africa (Nigeria) and South America (Brazil, Venezuela) over North America or Europe. Since CNOOC's 2005 failed bid to acquire Unocal Corp for $18.5 billion, Chinese companies have preferred minority stakes in the U.S. CNOOC is currently working on the $2.5 billion drilling stakes of Devon Energy Corp. Besides that, it has also bought minority stakes from Statoil's Gulf of Mexico assets in 2009 and Chesapeake Energy's shale assets in 2010-11.
The shares of both CNOOC and Nexen are up 24.10% and 47.82% since the beginning of the current year. The shares of Nexen in particular had jumped by as much as 50% in the last week of July when the news of CNOOC's bid was revealed.
CNOOC may be overpaying for Nexen in the short run, but for the future of Chinese economic growth, the resources have immense future value. As an investor, valuing these deals at today's prices is a mistake. The marginal demand for oil and gas in Asia will be tremendous, as this growth plays out. For the price of these assets to remain the same would mean holding demand and production in balance when it is demonstrably becoming more difficult to replenish reserves every year. Peak oil is not the problem. Peak oil at $40-50 per barrel is history. Deals like the Nexen and Progress acquisitions will become more common at valuations that will be even more shocking by today's standards.