Nexen Inc. staged its biggest rally since Cnooc Ltd. announced a $15.1 billion takeover of the oil and gas producer in July, signaling rising confidence Canada will approve the deal as the deadline for a decision approaches.
Nexen gained 1.8 percent to close at $24.79 in New York today after rising 3.9 percent on Nov. 30, the biggest jump since Chinese state-owned Cnooc announced its offer on July 23. Prime Minister Stephen Harper’s government is slated to finish its review of the takeover, the largest foreign purchase by a Chinese company, on Dec. 10.
“Overwhelmingly, the asset management community in Canada believes very strongly it’s going to get done because it’s hard to see a reason why it wouldn’t,” said John Stephenson, who oversees C$2.7 billion ($2.72 billion) at First Asset Investment Management Inc. in Toronto, including Nexen shares. “It’s still hugely in Canada’s interest.”
Canada is undertaking a “rigorous” review of Cnooc’s $27.50-a-share bid for Nexen, Immigration Minister Jason Kenney said in Ottawa. The government has pledged to attract investment to fund natural resource projects and to diversify exports away from the U.S., even as a recent poll shows a majority of Canadians oppose Nexen’s takeover. Proposed projects would add C$4 trillion to the economy in the coming decades, Natural Resources Minister Joe Oliver said.
Arbitrage traders are probably driving Nexen’s stock price volatility, Stephenson said. Nexen dropped five straight sessions in New York before the rally on Nov. 30. The three foreign takeovers Canada rejected in the last 25 years amount to a track record that’s “looking dodgy,” he said. Hedge funds now own 34 percent of Nexen, according to figures compiled by Bloomberg.
Cnooc needs Canada to sign off on the deal through its foreign takeover law, which requires a “net benefit” for the nation. Cnooc also needs U.S. approval to acquire Nexen’s Gulf of Mexico assets and agreement by the European Union and China.
Canada rejected a C$5.2 billion bid for Progress Energy Resources Corp. from Petroliam Nasional Bhd., Malaysia’s state-owned oil company on Oct. 19, on the grounds it was not of net benefit to Canada. Progress shares gained 1 percent in Toronto today after rising 3.3 percent to C$20.18 on Nov. 30. Petronas resubmitted its bid for Progress to address the government’s concerns.
Canada faces economic repercussions “for years to come” if it blocks takeovers of Nexen and Progress Energy, David Simon, founder and chief executive officer of Wall Street hedge fund Twin Capital Management LLC, said by phone from New York.
“The Canadian dollar will get killed,” said Simon, who owns shares in both Canadian companies. “Canada’s oil industry will be set back. These are two companies in desperate need of capital that nobody else really wants.” He called the offers from Cnooc and Petronas “a huge favor” to Canadians.
Finance Minister Jim Flaherty, speaking in Ottawa, said there is no “time deadline” for a decision on the deal. Beijing-based Cnooc and Nexen have both said in recent weeks the deal is expected to close before the year’s end.
Patti Lewis, a Nexen spokeswoman, did not immediately return a phone and e-mail message seeking comment on the likelihood and timing of approval. Cnooc’s expectation the deal will close by the end of the year “remains unchanged,” Peter Hunt, a Cnooc spokesman in Calgary, said by e-mail.
Canada extended its review of Cnooc’s bid for a second time on Nov. 2, setting the deadline to Dec. 10.
“It’s thought that we are approaching the decision point,” said Timothy Parker, portfolio manager at T. Rowe Price International Inc. in Baltimore, who holds Nexen shares. “As you get closer to the deadline it re-polarizes the situation. If you’re going to sell, you’re going to sell now. If you’re going to buy, you’re going to buy now,” Parker said. He said public statements from government ministers are seen as “tilting the odds” in favor of the deal. “The body language has been consistently more positive from official after official in recent weeks and months.”
Development of Canada’s resources, including the world’s third largest oil reserves in Alberta, requires foreign capital, the province’s Energy Minister Ken Hughes told reporters at a Calgary conference.
Harper has made it a “national priority” to sell more resources to Asia and to boost growth in the world’s 11th-largest economy by diversifying exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s shipments abroad.
“If Canada is not comfortable with investment coming in from state-owned energy companies, then we need to think about where we’re going to get the capital to develop the resources in this country,” Hughes said. “The implications of rejection of these kinds of investments -- it could be worth hundreds of billions of dollars of investment. This will set the tone for any other investment. This is exceedingly important for Canada.”
Canada rejected Melbourne-based BHP Billiton Ltd.’s $40 billion hostile takeover bid for Potash Corp. of Saskatchewan Inc. in 2010, the second rejection in 25 years following its blocking of Alliant Techsystems Inc.’s bid for MacDonald Dettwiler & Associates Ltd.’s space business in 2008.
The Canadian government’s “ambiguity” on the Cnooc-Nexen deal is keeping arbitrage traders playing the spread between Cnooc’s offer and Nexen’s share price for profit, said Rob Bellinski, an equity analyst at Morningstar Inc. in Chicago.
“There’s tremendous uncertainty around this deal,” Bellinski said. “There are no rules in place and the Canadian government hasn’t said what they’re looking for.”
Harper pledged Nov. 28 to issue new guidelines on foreign investments in Canada in “the near future.”
Even with the latest gain, the gap between the offer and stock price is 11 percent, ranking 14th of 111 North American deals tracked by Bloomberg. That indicates some investors are concerned the deal won’t win approval. The gap in the Progress bid is 8 percent, which ranks 18th among takeovers monitored.
Fifty-eight percent of Canadians believe the government should block the Nexen takeover, an online survey of 1,000 people taken Oct. 10 to Oct. 11 by Angus Reid Public Opinion showed. The New Democratic Party, Harper’s main opposition in Parliament, has opposed the bid.
Cnooc has made several commitments to win the government’s support for its bid, including listing its shares on the Toronto Stock Exchange, making Calgary its head office for North and Central American operations and maintaining Nexen’s employment levels and capital spending.
The Alberta government has lobbied for additional pledges from Cnooc, including that at least half of Nexen’s management and board positions be held by Canadians and that the company’s employment levels are maintained for at least five years, according to a person familiar with discussions.