Cnooc to Buy Failed Opti to Increase Oil-Sands Reserves

Cnooc to Acquire Failed Opti Canada to Add Oil Sands Assets
The headquarters of Cnooc Ltd. stand in Beijing. Photographer: Nelson Ching/Bloomberg

Cnooc Ltd., China’s biggest offshore oil producer, agreed to acquire Opti Canada Inc. for $2.1 billion in cash and debt 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 today. A shortage of cash to fund the extraction of heavy oil embedded in sand forced the Calgary-based producer to seek bankruptcy protection on July 13.

“The price is favorable compared to recent transactions,” Neil Beveridge and Ying Lou, Hong Kong-based analysts at Sanford C. Bernstein & Co., said in a research note. Cnooc is paying $1.15 a barrel on the total resource base compared with $2.15 a barrel paid by PTT Exploration & Production Pcl for a 40 percent stake in Statoil ASA’s project in Canada in November.

China Petrochemical Corp. and Cnooc are among companies that have invested more than $200 billion in ventures in Alberta to tap the world’s third-largest oil deposits after Saudi Arabia and Venezuela. Chinese companies have bid more than $88 billion for oil, natural gas and power assets overseas in the last five years to meet demand in the world’s biggest energy-consuming nation.

“The company will monitor trends in global energy markets and continue to look at and select projects,” Cnooc Chief Financial Officer Zhong Hua told reporters during a conference call from Beijing today. “As the company currently has relatively ample cash, we will consider any projects that fit our strategy.”

Cnooc Cash

Cnooc’s total debt stands at almost 19.4 billion yuan ($3 billion), according to data compiled by Bloomberg, and the company had 39.57 billion yuan in cash as of the end of 2010.

The company has spent more than $13 billion on acquisitions abroad in the past five years, Bloomberg data show. Cnooc, based in Beijing, paid C$150 million ($158 million) in 2005 for a stake in MEG Energy Corp. to gain access to oil-sands reserves and to expertise that may help tap such deposits in China.

“It’s more a strategic play,” Simon Powell, an analyst with CLSA Ltd. in Hong Kong, said by telephone today. “Cnooc wants to have some investments in oil sands. They want some oil-sands technology and some oil-sands capability and skills and this acquisition will give it to them.”

Long Lake Project

Cnooc fell 3.2 percent to close at HK$17.48 in Hong Kong while the benchmark Hang Seng Index rose 0.5 percent. The stock has declined 5.1 percent this year compared with a 4.5 percent drop in the benchmark. Opti had slumped 82 percent this year before trading was halted on July 13.

BMO Capital Markets and CIBC World Markets, along with Gowling Lafleur Henderson LLP advised Cnooc, while Scotia Waterous Inc., TD Securities Inc. and Macleod Dixon LLP advised Opti.

Opti’s main asset is its 35 percent stake in the Long Lake project operated by Nexen Inc. It has investments in three other project areas located in the Athabasca region of northeastern Alberta, according to today’s statement. The project employs a technology that injects steam underground to release fossil fuels embedded in sand.

“This is a win-win to smooth out the government red tape and mitigates CNOOC’s sole operating risks in these oil sands projects,” Gordon Kwan, an analyst for Mirae Asset Securities Ltd. in Hong Kong, wrote in a note to investors.

Cnooc Reserve Boost

The acquisition is expected to be completed in the fourth quarter and will bring with it 195 million barrels of proven reserves, Cnooc’s Zhong said. That will boost Cnooc’s proven reserves by 5.3 percent and production by 1 percent, he said.

Opti currently produces 30,000 barrels of oil a day and had “much room” for increased output, according to Zhong. Bernstein analysts Beveridge and Lou estimate that at full output it will produce 72,000 barrels a day of bitumen and 58,500 barrels of light crude.

“The transaction strengthens our Canadian presence in the oil-sands business,” Yang Hua, Cnooc’s chief executive officer, was cited as saying in the statement. “We believe that upside potential of the assets will facilitate local energy supply and our production growth in the long term.”

Project Delays

Oil sands are deposits of bitumen, an extra-heavy oil that must be treated for use in refineries to produce gasoline and diesel. Refining bitumen generally results in higher carbon emissions than conventional crude production, while the underground steaming process employed at Long Lake and other operations use as much as five times the volume of water for each barrel of oil produced.

Opti and Nexen had taken longer than they planned to inject enough steam underground to heat up reserves of bitumen to make it flow into pipes at Long Lake. The companies are also using more steam than they planned, which has raised costs and restrained production, Nexen said in February.

Opti’s bankruptcy-protection proceedings began July 13 under Canada’s Companies Creditors Arrangement Act. Opti has obtained C$375 million of new financing and backing from financial partners to restructure its debt.

The company said in June it would miss an interest payment on its second-lien debt. Opti sold debt to cover a shortfall in its operating budget as production at Long Lake failed to meet targets.

Opti bonds rose by the most on record today. Its $1 billion of 8.25 percent bonds due in December 2014 rose 11.5 cents to 65.3 cents on the dollar at 9:35 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

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