5 Likely Takeover Targets In Chinese Energy

by: Investment Underground

By Verena Baltes

Oil and gas stocks have taken a hit recently, as Europe’s sovereign debt crisis and the U.S. slowdown are raising concerns that the global economy will fall back into recession, causing a reduction in fuel demand. In such an environment, energy companies could find it more difficult to finance exploration and extraction.

This opens the door to acquisitions by Chinese energy companies, which have an advantage over other would-be buyers because of their access to cheap financing through Chinese state-owned banks. China can therefore take advantage of the slump in energy stocks to secure resources for its fast-growing economy.

The trend of overseas expansion by resource-hungry Chinese firms is not new, but it is accelerating. Since 2002, Sinopec (NYSE:SNP), China's largest producer and supplier of oil and petrochemical products, has been the leading acquirer among Asia-Pacific oil and gas firms, with $32 billion spent on overseas M&A. Sinopec is followed by China’s largest offshore energy producer CNOOC (NYSE:CEO), with acquisitions worth a total of $18.4 billion, and Petrochina (NYSE:PTR) with purchases valued at $14.3 billion.

Two recent deals, each worth about $2.1 billion and both expected to close in the fourth quarter, have helped to put North American energy companies in play.

The first deal is Sinopec’s takeover of Daylight Energy (OTC:DAYYF). Daylight Energy’s core assets are in 69 oil and gas fields in the Canadian provinces of Alberta and British Columbia. Around 70% of its production and reserves are natural gas, and the remainder is comprised of oil and natural gas liquids (NGLs).

The second deal is the acquisition of Opti Canada (OTC:OPCDF) by CNOOC. OPTI’s primary asset is a 35% working interest in the Long Lake oil-sands project in the Athabasca oil sands in Alberta. Large resources, low acquisition costs per barrel and large capital requirements make the Canadian oil sands particularly attractive to Chinese buyers.

These two deals pave the way for Chinese companies to take a direct and full ownership in Canada-based resource firms, whereas previously minority stakes, asset acquisitions or joint ventures were the norm.

Even though resource companies may be more willing to sell to foreign buyers, one of the biggest risks to cross-border commodity deals involving Canadian or American targets remains regulatory scrutiny. In the U.S., political opposition derailed a $19.4 billion offer for energy firm Unocal by CNOOC in 2005. Last year, Canada's government blocked a $39 billion bid by Anglo-Australian miner BHP Billiton (NYSE:BHP) for Potash Corp (NYSE:POT) because it did not offer a net benefit to Canada and because of POT’s strategic national value. However, the Daylight Energy and OPTI Canada takeovers have not met with resistance by regulators.

The following stocks are prime takeover targets for the Chinese energy majors:

Cenovus Energy (NYSE:CVE): Cenovus Energy's operations include oil sands properties and established crude oil and natural gas production in the Canadian provinces of Alberta and Saskatchewan. CVE also has stakes in two refineries in Illinois and Texas active in the processing of crude oil into petroleum and chemical products. As of the end of 2010, CVE had proved reserves of approximately 1,154 million barrels of bitumen, 169 million barrels of heavy oil, 111 million barrels of light and medium oil and NGLs, and 1,390 billion cubic feet of natural gas. CVE is the largest among the five potential takeover targets with a market cap of $23.74 billion.

Newfield Exploration (NYSE:NFX): Newfield Exploration's domestic areas of operation include the Mid-Continent, the Rocky Mountains, onshore Texas, Appalachia and the Gulf of Mexico. In addition, NFX generated almost 25% of its revenue in China and Malaysia last year. As of the end of 2010, it had proved reserves of 3,712 billion cubic feet equivalent. Newfield looks cheap as the value of its proven reserves, estimated at about $58 a share excluding debt, are well above its current share price. Its market cap is currently at $5.42 billion.

Nexen (NXY): Nexen operates and has a 65% working interest in the Long Lake project of OPTI Canada which is being bought by CNOOC, so it might be CNOOC’s next takeover target. Apart from mining bitumen in Alberta, Nexen’s Oil and Gas segment explores for, develops, and produces crude oil, natural gas onshore in Yemen and Canada, and offshore in the U.S. Gulf of Mexico and the U.K. North Sea, as well as in Colombia, offshore West Africa, and Norway. NXY’s Energy Marketing segment sells its own and third-party energy products. During 2010, NXY added 101 million barrels of oil equivalent of proved reserves, sold 36M barrels of oil equivalent associated with its heavy oil properties and produced 89M barrels of oil equivalent. It has proved reserves of 919 million barrels of oil equivalent and an equity value of $8.11 billion.

Kosmos Energy (NYSE:KOS): Kosmos Energy is a development-stage company focused on under-explored regions in Africa. Its portfolio of assets consists primarily of oil discoveries and prospects. It holds five licenses offshore in Ghana, onshore in Cameroon, and offshore in Morocco. KOS is of interest for Chinese oil majors mainly due its access to West African deep water oil, but also because of its size. KOS has a market cap of $4.87 billion.

Talisman Energy (NYSE:TLM): Talisman Energy, an upstream oil and gas company, engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and NGLs. It has operations in North America, the North Sea, and Indonesia. TLM is also conducting exploration in Southeast Asia, Algeria, Qatar, Colombia and Trinidad. It had 1.15 billion barrels of proven reserves of oil and gas at the end of last year. Although TLM recently cut its annual production target, its earnings are projected to increase by 80% in 2012. It has an equity value of $13.44 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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