Cnooc Purchase of BP’s $7.1 Billion Argentine Unit Scrapped

BP CEO Bob Dudley
BP Chief Executive Officer Bob Dudley. Photographer: Simon Dawson/Bloomberg

Cnooc Ltd.’s deal to buy BP Plc’s $7.1 billion stake in Argentine crude producer Pan American Energy LLC collapsed, 10 days after Argentina’s president ordered oil companies to repatriate export revenue.

BP will repay a $3.5 billion deposit it had received for the sale by Nov. 14, the company said after Bridas Corp., equally owned by Cnooc and the billionaire Bulgheroni family, announced Nov. 5 that the deal was canceled for “legal reasons.” Bridas owns 40 percent in Pan American and the purchase of the remaining 60 percent was pending Argentine antitrust approval.

The failure of the deal to buy Argentina’s biggest oil exporter means Cnooc, China’s biggest offshore energy explorer, may struggle to meet its production growth targets next year, according to Gordon Kwan, Mirae Asset Securities Ltd.’s head of regional energy research in Hong Kong. Cnooc shares dropped as much as 2.9 percent.

“It’s going to be very challenging for the company,” Simon Powell, a CLSA Ltd. analyst, said by phone today from Hong Kong. “Cnooc is going to have to try do more M&A deals globally to make up for it.”

Cnooc dropped 1.7 percent to HK$15 at 9:33 a.m. in Hong Kong, taking its decline to the year to 19 percent compared with the 14 percent drop in the benchmark Hang Seng Index.

The decision comes less than two weeks after Argentina’s President Cristina Fernandez de Kirchner, re-elected on Oct. 23, ordered energy and mining companies to repatriate future export revenue in a bid to slow accelerating capital flight from South America’s second-biggest economy.

Government Intervention

The move by Fernandez, who nationalized the $24 billion pension fund industry and has moved to block foreigners from purchasing rural land since taking office in 2007, was a sign that she will likely “increase intervention and pressures on the private sector” heading into her second term, said Daniel Kerner, a Latin America analyst at the Eurasia Group.

“Bridas has informed BP of its decision to cancel the sale,” Buenos Aires-based Bridas said in an e-mailed statement. “The decision is motivated by legal issues, the manner in which BP behaved during the transaction and its signing.”

Ratings Downgrade

Pan American was downgraded by both Moody´s Investors Service and Fitch Ratings last month after the government’s decision to increase control of export revenue. Fitch lowered its rating to B+ from BB-, citing “increased intervention” by Argentina.

Bridas said in its statement that neither Fernandez’s announcement nor the economic crisis in Europe had anything to do with the decision. BP said separately that the sale, initially due to be completed by June 30, “had been delayed because the Argentine antitrust and Chinese regulatory approvals required.”

BP sought to sell Pan American as part of its pledge to divest as much as $45 billion of fields after the Gulf of Mexico spill last year to shore up its balance sheet. The company has sold more than $19 billion in assets, excluding Pan American, since June 2010 and had about $18 billion in cash at the end of the third quarter.

‘Not Desperate’

BP Chief Executive Officer Bob Dudley said last week that the stake is “not an asset we’re desperate to sell.”

Cnooc said in a statement yesterday that the decision by Bridas “will not have any material adverse effect on the existing business or financial position of the group.”

“It’s a short term negative for Cnooc, as the firm could struggle with its 7-11 percent production growth target for 2012 without this BP deal,” said Mirae’s Kwan. “Long term, investors should be happy to see that Cnooc is prioritizing economics over completing deals at all costs. Going forward, Cnooc must discover some big fields in deep water to sustain the firm’s above-average growth.”

BP shares have fallen 2.8 percent this year in London trading to 452.55 pence on Nov.4.

BP was willing to let the transaction expire after a Nov. 1 deadline and continue as a partner in the Pan American venture, a person familiar with the transaction said in September. The deal was opposed by Argentine politicians, the person said.

Bridas is willing to continue negotiations, the company said. BP said on Oct. 25 that each party would have the right to terminate the accord without notice after Nov. 1 unless both agreed to extend the deadline and that it expected the deal to be completed in 2012.

“BP will now be considering all its strategic options regarding PAE,” spokesman Mark Salt said in an e-mailed statement yesterday.

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