There is speculation that Canadian Oil and Gas Producer Nexen Inc. (NYSE:NXY)'s proposed $15.1 billion takeover by China's CNOOC Limited (NYSE:CEO) is likely to fall through, amid government interference. The Canadian government is known to be very protective of the nation's interests, and recently rejected Petronas' bid for Progress Energy, citing minimal net benefits to the country. However, a closer examination of the two deals draws a mountain between the two, in terms of prospective benefits to the Canadian government in the long-term, which indicates that there is a likelihood that a CNOOC takeover of Nexen could go through. We noted some of the reasons in this article, but expand on the issue below.
However, there are major differences between the Petronas-Progress deal and the CNOOC-Nexen deal, as the latter is seen to bring more benefits to the Canadian people than its associated constraints. First, let's look at the at what many Canadians are afraid of, a foreign state owned company running the show at one of the nation's strategic companies. This fact applies in full force for the Petronas-Progress deal, but not so for the CNOOC-Nexen takeover.
Unlike Progress, whose shale gas projects are entirely based in Canada, Nexen Inc. (NYSE:NXY) is an international company, with only a third of its productive capacity sourced from the North American country. Notwithstanding, speculations are rife that CNOOC and Nexen Inc. (NYSE:NXY) could yet fail in their attempts to finalize the deal, as the two companies wait on the extended 30 day period, during which, the government will do a thorough review of the net benefits of the deal to the country.
The biggest concern is based on the Canadian government's outright rejection of the Progress deal, despite some notable benefits, such as the $2.5 billion premium placed on the deal, as well as royalty payments to the residents of British Columbia, from natural gas production to supply the LNG plants. However, on top of these "foregone benefits", the CNOOC-Nexen deal eliminates some obvious obstacles in the Petronas-Progress case as featured below:
Unlike Petronas, which could have easily been involved in a conflict of interest, in transactions involving LNG's exports to Asia, Nexen's international status rules out the possibility of conflicts of interest in pricing LNG. Furthermore, the Canadian government expressed its need for capital to move these projects forward in Canada, and having rejected the Petronas-Progress deal, the government should be willing to approve a CNOOC-Nexen takeover.
Interestingly, the CNOOC-Nexen deal came at a time when investment in Canadian oil sands from other third party countries is being scaled back in favor of shale liquids, which further solidifies the the Chinese company's bid to invest in its oil sands. CNOOC is noted to have done thorough preparation for the deal, including a well-defined post-merger plan for Nexen employees, as well as making Calgary its North America headquarters, not forgetting a secondary offering of the stock to be listed at the Toronto Stock Exchange (TSX).
The Picture beneath the Shale Fields
Looking at the whole scenario, it is pretty obvious to say that despite the Canadian Government's stringent rules on foreign investments in its Oil and Gas companies, which now are estimated at $30 billion, as compared to five years ago, when they were valued at $10 billion; the CNOOC-Nexen deal is set to go through.
First of all, rejecting the deal, which makes its two deals thrown through the window in a space of three months, could deem Canada a prohibitive destination for foreign investors, and I do not think there is any country that would aspire to have that kind of image. Additionally, there is also some kind of justification for why the government rejected a Petronas-Progress deal without succinctly, justifying its position. My bet is, it knew that CNOOC-Nexen was a better deal, only that it could not disclose that fact, while there was no way it was going to approve two deals under the critical public eye.
This is why, I believe the CNOOC-Nexen deal is set to go through, and its only a matter of time before this is confirmed, come November 12.
Disclosure: I do not hold any position any of the stocks mentioned and do not plan to do so within the next 72 hours.
By Nicholas Maithya of www.ValueWalk.com
Jacob Wolinsky is the Founder, and CEO of ValueWalk.com. Built up from the ground without any Venture capital funding, ValueWalk is the fastest growing Financial… More
Comments
First, there is a China Canada trade act becoming effective November 2 called FIPPA providing extensive protections to Sino-Canadian investments. This legislation has to become effective before the Nexen - Sinopec would even be looked at. Mr. Paradis has stated already that he will in all likelihood need more than the timeline of Nov 11 to opine on Nexen alone.
Progress-Petronas had the tough luck that Paradis as them explicitly for more time in good faith but there was a communications problem that prompted Petronas not to grant Paradis more time.. And so, paradis had no other option than to sent the deal back to the drawing board by rejecting it. As you can see though both parties to the regulatory deliberations are back to the negotiating table and the drop dead date on the deal has been shifted out to November 30, is extendable at petronas option all the way to mid January. The deal is back to square one as regards the detailed fine tuning of concessions.
Timeline wise it is smarter for the Harper government to approve Nexen first and then approve Progress. The government will soon issue framework rules defining net benefit to canada in the context of SOE investments. Lets not forget that SOE control more than 80% of oil reserves today, versus some 15% several decades back. you are thus looking at a very different world today than say 30 years back. This no doubt does not escape the Harper government and it also does not escape Petronas. Petronas has a declining reserve profile and they are very much interested in shale gas.
For slightly different reasons, Harper government has more interest in oil sands right now than in shale gas. There is an urge to debottleneck the oil sands industry contraints. Not only since Keystone XL was scuttled but also since the Northern Gateway project by Enbridge is far from an assured deal.
If you look at Harper background himself, he is not exactly a veteran but he has some extensive background working at oil sands firm Imperial Oil (70% controlled by Exxon) and so has his father. Oil sands runs in the family blood and although Mr Harper is from Toronto, its really Calgary that provided him with the platform for his political career. The entire Harper government is being constantly lobbied by the big oil players and this should come as no surprise. Some folks have accused him of playing a Shell -game, inasmuch Shell is a prime beneficiary when the Enbridge pipelien comes on stream and gets to export half a million barrels of bitumen per day to the west coast.. if and when this happens. This is far from assured though as Enbridge pipeline is running into lots of opposition.
So, given that gazillion Conservative politicians have thrown all their weight in support of Enbridge and given how controversial this project is for both the Harper government and for Shell ultimately, it will be a pleasure for Harper Gov to invite Nexen to the game as a wedge. Most likely Nexen will do the dirty work when it comes to all the First Nation permitting and Shell will stay out of the limelight. Officially all the enviro disasters can be blames on Nexen and Sinopac and this will come very handy to the greenwash corporate image of Shell. By inviting Nexen to the fold, they are certainly taking away some of the pressure from Enbridge and Shell. Or diversifying the risk of failure.
For all of Enbridge, Shell and Nexen, Kitimat will be the hub to offload bitumen. That is how is has been planned for the longest of the last 30 years with all kinds of federal permits in place. Nexen will most likely have to go along with these government wishes. Because Shell is developing huge infrastructure in Kitimat.
Unlike Progress/Petronas who want to do something in Prince Rupert. I honestly dont think that the Government of Canada is at this point willing to open too many environmental battle grounds although it could be a nice deflection tactic to battle the opponents on multiple battle grounds. My view is that all these projects will be approved and that within the next 3, 4 years all the development dollars will be used to annihilate local pockets of protest, or otherwise be greenmailed away with bagfuls of hard currency., ringits, yuan etc. the more the merrier. I have no naive view here. Money speaks loudest. Nexen has aside from the Canadian oil sands also about 1 million acres of montney shale lands. Progress has some 1.1 million acres of prime montney resources. The montney is a lot superior than any of the US shales. Just about in any respect. The drawback is poor infrastructure compared to US.
The Harper government needs allies and nobody with a reasonable business plan will be rejected. The Progress business plan has good benefits and its not inherently rejectable but they should have waited till their time would be ripe and this was definitely after Nexen. Progress approval loop will be proof of regulatory toughness. thats all.