Biggest China Deal Sours as Cnooc Ratings Hit 3-Year Low

Biggest China Deal Sours as Cnooc Ratings Hit 3-Year Low
Cnooc is organizing a $6 billion, 12-month bridge loan to fund the takeover. Photographer: Nelson Ching/Bloomberg

China’s biggest foreign acquisition is underwhelming Wall Street.

Cnooc Ltd.’s analyst ratings have sunk to their lowest level in three years just as the Chinese state-controlled oil explorer prepares to buy Canada’s Nexen Inc. for $15.1 billion in a deal that escalates production expenses.

China’s lowest-cost producer will take over a Western company that pumps about 200,000 barrels a day at a cost of $20.84-a-barrel of oil equivalent, according to data compiled by Bloomberg. That’s more than twice Beijing-based Cnooc’s average cost last year of $9.01 to turn out 950,000 barrels daily.

The deal underscores China’s unprecedented urge to buy oil deposits even at above-average costs to feed an economy the U.S. National Intelligence Council this week forecast will surpass the U.S. before 2030. China, the world’s biggest energy-consuming nation, is leading a surge in Asian oil and gas acquisitions that has surpassed $100 billion this year.

“Cnooc is adding assets at a very high cost, which means shareholders won’t see reasonable returns in the next year or two,” said Shi Yan, an energy analyst at UOB-Kay Hian Ltd. in Shanghai who cut her buy rating to hold on Dec. 10, two days after Canada approved the deal. “Unless you are the Chinese government, I don’t see why investors should be excited about the deal.”

The shares will return 1.2 percent over the next year, compared with 2.5 percent for domestic competitor PetroChina Co. and 6.8 percent for Exxon Mobil Corp., according to data from analysts surveyed by Bloomberg.

Consensus Dip

Two days after Canada approved the Nexen deal on Dec. 7, the recommendation consensus for Cnooc of 34 analysts dipped to 3.38, the lowest since July 2009. Buy ratings get five points, holds three and sells one. Nine of 21 buy ratings were lost since the deal was announced on July 23.

Nexen, a Calgary-based oil-sands and offshore explorer, ranks near the bottom of the world’s biggest oil companies in earnings performance. Its adjusted earnings per share in U.S. dollars will drop 35 percent to $1.50 in 2012, compared with a 38 percent average increase for the 67 members of the Bloomberg World Oil & Gas Index, estimates compiled by Bloomberg show.

Lower Dividend

Reduced profitability would weigh on free cash flow, which is estimated to decline 31.9 billion yuan ($6.3 billion) this year from 64.3 billion yuan last year, according to data compiled by Bloomberg. Cnooc is predicted to cut its full-year dividend to 35 Hong Kong cents in March from 53 cents a year earlier, according to Bloomberg forecasts.

A Beijing-based Cnooc spokeswoman declined to comment on the Nexen deal. Patti Lewis, a spokeswoman for Nexen in Calgary, didn’t return a voicemail and e-mail seeking comment on the ratings cuts and takeover agreement.

“I don’t want to take anything away from Cnooc, but this deal doesn’t improve Cnooc’s earnings very much,” said Simon Powell, head of Asian oil and gas research at CLSA Ltd. in Hong Kong. “While Cnooc will add some production and reserves, it has to pay high operation costs and financing charges.”

Cnooc shares rose 0.5 percent to HK$16.88 in Hong Kong. The stock has gained 9.3 percent since the Nexen deal was announced, trailing the 19 percent increase in the benchmark Hang Seng Index. Domestic competitor PetroChina has risen 14 percent in that period. Nexen surged 57 percent in New York since the last day of trading before the announcement.

Premium Offer

The $27.50 a share offer for Nexen was at a 61 percent premium to the Calgary-based company’s July 20 closing price. The U.S. government has yet to approve the deal.

PetroChina’s production cost was $11.54 last year, while China Petroleum & Chemical Corp. spent $15.43. The figure was $9.44 for Exxon Mobil, the world’s biggest energy company by market value, and $10.78 for Royal Dutch Shell Plc, Europe’s largest, data compiled by Bloomberg show.

Cnooc is organizing a $6 billion, 12-month bridge loan to fund the takeover, according to people familiar with the matter. The borrowing may be refinanced by selling bonds, said Owen Gallimore, a Singapore-based credit trading desk analyst at Australia & New Zealand Banking Group Ltd.

Every three of five analysts surveyed by Bloomberg rate Cnooc shares hold or sell, while a similar number recommend buying bigger rival China Petroleum & Chemical Corp.’s stock. Cnooc, China’s biggest offshore energy explorer, won approval from Canadian Prime Minister Stephen Harper’s government last week to buy Nexen and gain access to the world’s third-biggest oil reserves in Canada.

Growing Appetite

The appetite for oil and gas assets among Asia-Pacific companies is growing after energy demand in the region rose at more than double the world average of 2.5 percent last year.

Beijing-based Petrochina agreed to pay Canada’s Encana Corp. $1.2 billion for a 49.9 percent stake in its Alberta shale formation, Encana said in a statement yesterday. The deal was announced on the heels of another deal this week, in which PetroChina agreed to pay $1.63 billion for a stake in the Browse liquefied natural gas venture in Australia.

China’s energy use is projected to rise 16 percent to 124.2 quadrillion British thermal units by 2015 from 2011 levels, according to U.S. Energy Information Administration data.

Buying Nexen will give Cnooc oil and gas assets in Canada, the U.K. and the U.S. Last year, 29 percent of Nexen’s daily oil and gas production of 207,000 barrels of oil equivalent came from Canada, according to the company’s annual report. The U.K. accounted for 43 percent of output.

Nexen reported C$697 million net income in the year ended Dec. 31, 2011, 38 percent lower than the previous year. Profit is estimated to fall 21 percent this year to C$549.4 million, according to the average estimate of five analysts surveyed by Bloomberg. Cnooc’s 2012 profit will drop to 65.4 billion yuan from 70.3 billion yuan from a year ago, according to the average estimate of 20 analysts.

Shale Surge

Asian companies are seeking assets in North America after the continent last year reported the world’s biggest increase in oil and gas production after the Middle East. A surge in gas produced by cracking open shale rocks in the U.S. made it the world’s biggest producer of the fuel in 2009.

Cnooc paid a high premium price for Nexen assets, which would probably further shrink Cnooc’s overall profit margin in the next couple of years, Shi said. Cnooc’s net income margin shrank to 29.16 percent in 2011, the lowest since 2003, according to data compiled by Bloomberg.

The Nexen purchase may help profit growth should Cnooc effectively develop Nexen’s oil reserves in North America, the North Sea and in West Africa, said Neil Beveridge, senior analyst at Sanford C. Bernstein & Co. in Hong Kong. Running some of Nexen’s fields would give Cnooc experience in offshore operations, helping it develop other offshore fields in China, said Beveridge, who has an “outperform” recommendation on the shares.

“Cnooc needs to now demonstrate to the market that they can add value to Nexen and justify the premium paid,” Beveridge said.

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