On July 23, two of China’s national oil corporations announced major deals involving the Canadian companies Nexen and Talisman. The transactions are very different in nature.
CNOOC – Nexen is a full-blown “agreed” takeover at a modest (61%) share price premium, the other involves Sinopec taking a 49% stake in Talisman’s UK business unit.
Both are eyebrow-raising and it is CNOOC’s intended takeover of Nexen that is attracting the greater attention by far. However, the Sinopec-Talisman UK deal exposes issues too.
And for the UK North Sea, together they highlight what I believe to be a very serious issue, namely that Chinese companies have in one fell swoop, taken control of around 10% of UKCS production.
And apparently the UK Government is quite happy about it. If it brings in more foreign investment then such deals have to be good, or at least that seems to be the mantra . . . the same old weary mantra that I consider to be deeply flawed.
You can bet your bottom dollar that the Chinese will be back . . . cutting further deals, and at a premium to what Western companies might be willing to pay . . . and worryingly, taking increasing control of OUR hydrocarbon resources.
In both cases, the Chinese companies aren’t so much interested in the oil per-se, rather it is the premium value of Brent blend as a generator of foreign currency that can then be used to go and buy discounted and geographically more convenient crude elsewhere in the world to load aboard tankers and cart to China for refining and so-forth. Ditto for gas, though it comprises only a small portion of Nexen/Talisman’s UKCS portfolios. Nexen and Talisman output will continue to be largely sold and consumed within the EU.
It has been speculated by some who should know better that the Chinese will somehow exert market pressure to drive down the price of Brent Blend. Rubbish, and for the reason just explained.
The Talisman transaction is basically an assets deal . . . 49% of the heavily oil-weighted UK portfolio for $1.5billion. Again, some who should know better reckon that the Chinese are overpaying. My view is that so-called experts like Bernstein Research analyst Neil Beveridge are wrong. They are conditioned to Western majors being unwilling to pay any more than six bucks a barrel whereas National Oil Corporations will cheerfully pay a lot more . . . AND STILL MAKE MONEY.
Beveridge said Sinopec appears to be overpaying for the non-operated stake in the Talisman assets. The discounted future value of cash flow of the proven remaining reserves is said to be $1.41billion, which would imply that Sinopec is “paying a 100% premium to the intrinsic value of proven reserves,” he said in a note.
Basically, Sinopec is paying close to $12.50 per barrel oil equivalent and has at its disposal the cash that Talisman so badly need to invest in the UK sector. Talisman is a successful company and has done wonderful things since 1996 with mature assets bought off majors who decided they couldn’t make them pay.
Talisman is also modest in size and has had to make tough decisions as to where it invest its money to maximise growth. The North Sea is no longer a top priority, but it can be turned around, if enough cash is poured in. That’s the thesis that Sinopec has apparently bought into with enthusiasm. So, we can look forward to a lift in the Canadian company’s UKCS output as the dollars pour in.
This begs the question . . . if a huge Chinese company like Sinopec believes the tired old North Sea is a good investment bet, what the hell is wrong with Western upstream oil and gas business models? That’s a serious question.
Does this mean that Sinopec will next angle for a similar deal in Norway?
Not for now at least. But if it tried, I rather think Oslo would knock it back. There’s only space for one NOC in Norwegian waters and that’s Statoil, even if CNOOC was cozied up to its Norwegian counterpart at the 2010 Offshore Northern Seas show in Stavanger . . . literally, as the picture shows.
Of the two deals, the more dangerous is the $15.1billion CNOOC-Nexen transaction, assuming it gets through.
Opposition is emerging. For example, some US politicians are seeking to put pressure on Ottowa to block the takeover.
In a draft letter obtained by the Reuters news agency, Charles Schumer, the Senate’s No. 3 Democrat and a frequent critic of China’s trade and currency policy, said the powerful Committee on Foreign Investment in the United States (CFIUS) should not approve the deal until China makes “tangible, enforceable commitments” on market access for US companies.
The US inter-agency committee reviews foreign takeovers of US assets for national security concerns. About 10% of Nexen’s assets are in the US and this makes it curiously similar to CNOOC’s attempted takeout of Unocal, an American company that in fact had most of its assets located in Asia-Pacific and very modest domestic production (or indeed aspirations).
Proportionately, Nexen is a far larger domestic reserves base than Unocal; ergo it is more important to Canada strategically than Unocal has ever been.
Washington is in effect the proverbial elephant in Ottowa’s room and you can’t ignore a neighbour ten times your size. US-Canadian relations are not necessarily as comfortable as you might think; not by a long chalk.
A leading Canadian analyst/market commentator has suggested that Ottowa was sleep walking when CNOOC left its calling card. He thinks the deal in its current form should be stopped.
Basically, Jim Doak of Megantic Asset Management wants the North American interests of Nexen stripped out, leaving only the company’s foreign holdings including of course the North Sea where Nexen’s grip is strong.
In Nexen’s case, one would have to be blind not to recognise that what CNOOC is really after is its North American and especially Canadian hydrocarbons.
Above all else, the Chinese are after resources and Canada has these in abundance . . . from high grade crudes and natural gas to shale-derived output to the controversial tar sands.
It just happens, however, that the North Sea is a great way of generating foreign exchange. And we could all end up being the losers if London fails to effectively control the manner in which more and more of our resources come under foreign control. Likewise the supply chain, by the way.