Barron's says CNOOC (CEO) acquisition of Unocal (UCL) unlikely

According to an article in Barron's (subscription required), CNOOC (ticker: CEO), a Chinese oil and gas company is unlikely to outbid Chevron (ticker CVX) and acquire US oil and gas company Unocal (ticker: UCL). Here's why:

Philip Adams of Gimme Credit

• CNOOC could make a hostile offer funded by $8.6 billion in
  debt and could "fairly easily finance a $17 billion all-cash offer and
  remain investment grade." But "Unocal shareholders
  would probably demand more."

Merrill Lynch

• Downgraded CNOOC to neutral.
• Said the deal is unlikely due to the potential for a large equity offering
  and US properties that don't fit CNOOC's needs.
• "It does not make sense to us for CNOOC to pay more than Chevron given the latter's lower cost of capital".

Scott MacDonald of Aladdin Capital

• "Oil
  is a strategic resource. I don't think they'll get Unocal. There's too
  much political heat."

Other reasons why a CNOOC acquisition won't happen

• CNOOC would have to pay a $500 million penalty to break up the Chevron bid.

Barron's conclusion

....As Merrill points out, a Unocal bid has
rattled CNOOC's board, with some thinking the deal may not be in the
best interests of CNOOC's minority shareholders. We'd be inclined to
agree.