China's energy-buying binge is just starting
More deals are coming after CNOOC's $15B grab of Canada's Nexen.
By Aaron Levitt
Most investors had never heard of Canadian energy company Nexen (NXY) -- until Monday, when it became the center of the largest overseas takeover from a Chinese company. China's biggest offshore oil and gas explorer, CNOOC (CEO) has agreed to pay $27.50 for each common share of Nexen, or roughly $15.1 billion. That's nearly a 61% premium to the company's closing price on July 20.
China has certainly taken notice of North America's shale oil boom. Earlier this year, Sinopec (SHI) made its first incursion into U.S. shale with a $2.2 billion investment to create a joint venture with Devon Energy (DVN). However, China's latest deal just goes to show how serious the Asian Dragon is about securing these resources.
The move is the most ambitious venture yet by the commodities-hungry nation into the North American energy sector since its failed 2005 attempt to buy Unocal for $18.5 billion. That deal was thwarted by a U.S. political backlash.
If successful, the Nexen buyout will give CNOOC and China access to Nexen's assets in Canada, the U.K., West Africa and the Gulf of Mexico. Those Gulf assets produced nearly 207,000 barrels a day in the second quarter of 2012 as the U.S. drilling moratorium ended. Ultimately, CNOOC will add more than 900 million barrels of oil equivalent to its reserves at a cost of only $19.94 per barrel through the deal.
It certainly needs those assets. Based on its current production, CNOOC has only about nine years worth of reserves. That puts it at the bottom of the pack when it comes to major oil companies worldwide. With a goal of increasing production by 3% a year, the deal will increase CNOOC's proven reserves by more than 30%. That will go a long way toward helping China meet its growing energy needs.
Analysts estimate that China will produce 4.5 million barrels per day in 2012. However, the nation's current demand is pegged at roughly 10.3 million barrels per day. That means a lot of imports as well as additional asset/reserve acquisitions.
Overall, securing these assets now, while prices are relatively cheap, makes strategic sense for any nation or company. In addition, many of the acquiring Chinese companies are behind the curve in terms of drilling technology. By purchasing smaller to midsize North American energy companies, China can gain access not only to these critical resources, but to the know-how for tapping them.
The U.S. Energy Information Administration estimates that China holds around a fifth of all shale resources and has the largest technically recoverable assets on the planet. Yet, its state-owned oil enterprises lack the capabilities to tap that potential without outside help.
That'll send China back to the well again in North America -- especially to Canada, which has become the go-to region for Chinese energy producers seeking to add reserves. Including the Nexen-CNOOC deal, Chinese companies have spent roughly $49 billion buying Canadian energy assets. That compares to just $3.5 billion spent on U.S. acquisitions.
Canada accounts for over 90% of all proven energy reserves outside of OPEC, and in an effort to reduce its dependence on the U.S., Canadian Prime Minister Steven Harper and his administration have effectively put out an "open for business" sign to attract more foreign investment. Politically, Canada remains that place to pick up vast reserves easily.
Playing China's energy ambitions
For investors, the Nexen-CNOOC deal underscores China's energy ambitions. Overall, the nation needs more reserves and North America -- particularly Canada -- has exactly what it's looking for. This pattern of joint venture/buyout should continue to play out over the next few years. For energy investors, that could spell opportunity.
Picking an M&A target among Canada's energy sector is a daunting task, but the sheer size of the Nexen-CNOOC deal puts beleaguered EnCana (ECA) in China's crosshairs. It's one of North America's largest natural gas producers and the largest independent producer in Canada. Last year, a proposed joint venture between EnCana and PetroChina (PTR) worth roughly $5.4 billion fell through.
Since that time, EnCana shares have fallen hard as ultra-low natural gas prices have taken their toll. Given the company's $16 billion market cap and China's thirst for energy, I wouldn't be surprised if the company announced some sort of deal this year.
Perhaps even more of a "sure thing" could be found in the trio of Baytex (BTX), Enerplus (ERF) and Pengrowth (PGH). All feature low market caps and great unconventional shale/oil sands reserves. Already, China has flocked to many such companies as a cheap way to add reserves. Sinopec's buyout of Daylight Energy was the latest example of this, and these three could be the next to go.
Overall, the lesson here is that China is willing to go to great lengths to secure the supplies it needs. For investors, that means loading up on selected shale producers in North America.
As of this writing, Aaron Levitt doesn't own any securities mentioned here.
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Lenin said the capitalist will sell me the rope I use to hang him. This is no different; selling natural resources to China is crazy. There is no reason to help China gain control of North American resources and have major influence on energy consumption and policies.
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