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Who wins as China chases Unocal?
China's CNOOC tries to trump Chevron with an $18.5 billion bid -- but will it survive critics who call the deal a national security threat? Chances look good, and that could make other energy companies a buy for investors.
By Michael Brush
While it's still unclear whether Unocal (UCL, news, msgs) shareholders -- or the U.S. government, for that matter -- will ever approve an $18.5 billion all-cash buyout offer from China National Offshore Oil (CEO, news, msgs), one thing is certain.
The bid -- which from a dollars-and-cents standpoint tops a $16.6 billion cash and stock offer from Chevron (CVX, news, msgs) -- instantly created a series of winners and losers around the globe this week.
Here's a look at who benefits and who suffers in the battle for Unocal, and what you should do if you hold shares in Unocal and many of the other energy companies that will inevitably be affected by the CNOOC bid.
Winners, part 1: Unocal shareholders
"Unocal shareholders get a great deal out of this because the offers are a whole lot higher than the fair value we put on Unocal shares as a standalone entity," says Michael Cumming, who covers energy stocks for Morningstar.
CNOOC's bid is worth $67 a share; Chevron's offer works out to $62 a share. Unocal trades for about $65.40. But things could get even better for Unocal shareholders, particularly if a bidding war breaks out.
Initially, analysts worried that national-security concerns would drag out approval of a CNOOC deal, making Chevron's lowball offer more attractive. Unocal shareholders would have to pay at least a 15% capital-gains tax on the cash they received from CNOOC, points out Mike Blatt, portfolio manager at Chemung Canal Trust. That makes the offer less attractive than a mix of 25% cash and 75% stock from Chevron.
By the end of the week, however, energy sector analysts like Fadel Gheit of Oppenheimer & Co. were putting better than 50-50 odds on the success of the CNOOC bid -- in part because energy sector leaders were coming out strongly against interference in the deal from Washington, D.C.
"I am beginning to see a lot of industry officials, led by Exxon Mobil (XOM, news, msgs) Chairman and Chief Executive Lee Raymond, criticizing any government effort to block this deal," says Gheit. He says Amerada Hess (AHC, news, msgs) chief John Hess has also expressed similar views to him privately.
The biggest fear: If the United States makes it hard for China to invest in a U.S. energy company, U.S. companies may start to see similar resistance if they try to make investments abroad. But if energy sector leaders convince Washington to tread lightly on the CNOOC offer, that could speed up the time line and increase the chances that a CNOOC-Unocal deal gets done.
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"I think the odds are pretty good," says Charlie Ober, who manages the T. Rowe Price New Era Fund (PRNEX). One obvious way out would be for CNOOC to sell U.S.-based energy assets held by Unocal to Chevron or some other energy company, as a way to ease national security concerns.
The bottom line: Things look a lot brighter for the CNOOC offer than they did a few days ago. So a minor bidding battle could break out that would reward Unocal shareholders.
Unocal shareholders may be tempted to take some money off the table now, because the whole energy sector could pull back dramatically if oil comes down from recent highs above $60. But they would be smart to hold out. "Wait for higher bid," says Gheit.
Winners, part 2: Other energy shareholders
It's been an open secret for a while that China is on the hunt for long-term strategic energy assets. That's one reason shareholders of companies like Talisman Energy (TLM, news, msgs), Murphy Oil (MUR, news, msgs), Canadian Natural Resources (CNQ, news, msgs) and Apache (APA, news, msgs) have done well since we suggested them as plays on this theme at the start of the year.
CNOOC's bid this week for Unocal confirmed this theme and suggests that stocks like these could go even higher. "The CNOOC bid reinforces the belief that the Chinese are anxious from a strategic standpoint to secure access to hydrocarbon reserves," says Ober of T. Rowe Price. "I found it surprisingly aggressive that they would be willing to take the political heat for trying to buy U.S. assets." If the deal goes through, it will set a precedent for more Chinese purchases in the U.S. and Canada, says Ober.
But given the recent run in stocks like these that look like potential buyout candidates, Brian Hicks of the Global Resources Fund (PSPFX), a U.S. Global Investors natural resources fund that is up over 50% in the past year, would hold off on taking fresh positions. "I am just a little hesitant because they are bumping up against previous highs or breaking through highs," he says. "With a 5% retrace we would nibble, and with a 10% we would get more aggressive."
Oppenheimer's Gheit thinks larger oil companies like ConocoPhillips (COP, news, msgs), Marathon Oil (MRO, news, msgs), Anadarko Petroleum (APC, news, msgs), EnCana (ECA, news, msgs) and Devon Energy (DVN, news, msgs) are the true potential buyout targets of the major integrated oil companies like Royal Dutch Petroleum (RD, news, msgs).
He would buy these potential targets right now -- because he thinks oil in the $50 to $60 range is here to stay. Earnings projections for energy companies like these are still based on the expectation that oil will return to the $35 to $40 range -- but Gheit isn't convinced that will happen.
Losers, part 1: Politicians
It didn't take long for politicians in Washington, D.C., to attack the CNOOC bid for Unocal. Shortly after the deal was announced, representatives like William Jefferson, D-La., Al Green, D-Texas, Bobby Jindal, R-La., and Kevin Brady, R-Texas, were calling for investigations on the grounds of national security concerns.
Industry analysts were quick to counter that these concerns are absurd, if only because Unocal produces less than 1% of U.S. energy. Most of Unocal assets are in the Asian region -- exactly why the Chinese national oil company CNOOC is interested in those reserves.
"I don't believe there are national security issues," says Lawrence Goldstein of Petroleum Industry Research Foundation in New York.
What's worse, if taken too far, the rhetoric could make it harder for U.S.-based energy companies to operate in foreign countries. "We have to search the world for energy and we expect to work on an even paying field. If we stop this deal a U.S. company might run into the same thing somewhere else in the world," says Goldstein.
"It's an embarrassment that we have politicians saying we have to block this deal not knowing that 70% of Exxon's assets are outside of the U.S.," agrees Gheit.
If CNOOC got Unocal's U.S.-based assets, most of what is produced here would still be used here. "It wouldn't make sense to ship it to China," says Hicks of the Global Resources fund.
Losers, part 2: Integrity on Wall Street
Despite myriad investigations into Wall Street scandals over the past five years, the CNOOC offer showed once again there's no shortage of improper -- if not downright illegal -- whispering among in-the-know insiders ready to make a quick buck ahead of news of important deals.
News of the CNOOC bid was officially announced on June 22, but it publicly surfaced on June 21 in a press report. In the 10 days leading up to that news, Unocal shares advanced 12% to over $65 from under $58, suggesting folks were aware the deal was coming, and profited handsomely.
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