Cnooc’s $2.1 Billion Oil-Sands Deal ‘High Risk,’ Jefferies Says

Cnooc Ltd. (883)’s $2.1 billion purchase of oil-sands producer Opti Canada Inc. (OPC) is a “high risk” wager on output growth, Jefferies Group Inc. said.

The deal values Opti’s proved and probable reserves at $3.54 a barrel and its production at about $275,000 a barrel of daily output, Laban Yu, a Hong Kong-based analyst at Jefferies, said in a research note. The valuation suggests Cnooc “expects substantial production increases,” the analyst said.

Cnooc, China’s biggest offshore oil producer, agreed to acquire Calgary-based Opti this week to increase its oil-sands reserves, and pledged to buy more energy assets globally. Cnooc will pay $34 million in cash for the Canadian company’s shares, $1.18 billion for some notes and assume $825 million of debt, Opti said in a statement yesterday.

Chinese companies have been snapping up oil sands following gains in crude prices. China Petrochemical Corp., the Beijing- based company known as Sinopec Group, agreed to pay ConocoPhillips $4.65 billion for its stake in oil-sands producer Syncrude Canada Ltd. last year.

Cnooc’s acquisition of Opti’s reserves represents a 65 percent discount to Sinopec’s Syncrude purchase, while Opti’s production was valued at an 86 percent premium to Syncrude, according to Jefferies’ note.

Cnooc is taking a risk because Opti’s main asset, a 35 percent stake in the Long Lake project operated by Nexen Inc., hasn’t performed to expectations. Production at Long Lake is about 28,300 barrels a day of bitumen, according to a June presentation. That’s below the target capacity of 72,000 barrels a day, which was initially slated for late 2009. Long Lake was shut in January to rectify water-treatment faults.

Cnooc may generate returns from the deal if output begins to reach target at Long Lake. In 2008, before production problems emerged and when oil was about 30 percent higher, Opti had an enterprise value of $6.7 billion, more than triple Cnooc’s purchase price.

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