China's Biggest Acquisition


On Friday, Canada cleared two important acquisitions of Canadian companies by foreign state-owned enterprises. The deals are quite significant, both in terms of size, and what they mean for the future of energy production in Canada.

The deals
CNOOC was given permission by the Canadian government to acquire Nexen for $15.1 billion, which, according to Bloomberg, makes it the largest takeover ever by a Chinese company. Among other terms, CNOOC committed to the following stipulations in order to curry favor with the Canadian government and eventually get its plan approved:

  • List shares on the Toronto stock exchange

  • Establish Calgary as its base for all North American and Central American operations

  • Maintain Nexen's employment levels

  • Maintain Nexen's capital spending program

These are significant commitments because of the effects they can have on how CNOOC runs its new business, particularly the employment level and spending terms. However, the advantages CNOOC gains in the deal may far outweigh the detriments such terms may cause. Nexen has a wide range of assets and experience that CNOOC can bring home and apply to domestic production, particularly when it comes to shale gas and deepwater production.

In addition to tremendous experience, CNOOC picks up Nexen's stake in the North Sea's Buzzard field. In the face of declining North Sea production, Buzzard has become the most important contributor to the crude blend used to price the Brent benchmark.

Finally, after initially blocking the takeover bid of Progress Energy by Malaysia's state-owned oil company Petronas in October, Ottawa also gave this deal the go-ahead on Friday. The deal was worth about $5.2 billion.

No more foreign acquisitions
Both approvals came with a stern warning that this will be the end of a trend in Canada, not the beginning. Prime Minister Stephen Harper stressed that outside of "exceptional circumstances" there will be no more foreign takeovers in the Canadian oil sands by state-owned companies, though they will still be allowed to participate in joint ventures and minority acquisitions.

And participate they will. Canada absolutely needs foreign investment to develop its resources. Canadian Energy Minister Joe Oliver expects $660 billion to be injected into more than 600 Canadian energy projects over the course of the next 10 years, a number that he expects to grow. Canada doesn't have that kind of cash lying around, so foreign investment will be crucial going forward.

This brings up an important footnote to Friday's announcement. Approval of the two deals also came with clarification about which foreign takeover deals would warrant a government review in the future. Harper declared that any takeover by a private company of a business with an enterprise value (assets and liabilities) of $1 billion or more, and any takeover by a state-owned company with an asset value of $330 million will be subject to review.

The other trend at play
This mega-deal highlights another important pattern in the world of energy investment. CNOOC, which stands for China National Offshore Oil Corporation, is one of China's three state-owned oil companies; Sinopec and PetroChina are the others. Over the past few years, these companies have been spending quite a bit of money acquiring assets -- and experience -- across the globe.

In many cases the companies are picking up joint venture stakes in order to avoid the sort of scrutiny and hoop-jumping that CNOOC experienced with the Nexen deal. Some of China's major deals from the recent past include:

  • 2010: Sinopec spends $7.1 billion establishing a joint venture with Repsol in Brazil.

  • 2010: Sinopec acquires Occidental Petroleum's Argentine oil and gas business for $2.45 billion.

  • 2011: CNOOC spends $1 billion buying into a joint venture with Chesapeake Energy (NYSE: CHK).

  • 2011: CNOOC buys Opti Canada, another oil sands outfit, for $2.1 billion.

  • 2011: Sinopec spends $2.16 billion buying Canada's Daylight Energy.

  • 2012: PetroChina buys the remaining 40% stake in Athabasca Oil Sands Corporation's MacKay River project.

  • 2012: PetroChina buys a 20% stake in a Royal Dutch Shell Canadian shale gas project.

  • 2012: Sinopec spends $2.2 billion on a joint venture with Devon Energy , giving it access to five different U.S. shale plays.

  • 2012: Sinopec acquires a 49% stake in Talisman Energy's North Sea assets.

  • 2012: Sinopec spends $2.5 billion on Total's 20% stake in a Nigerian offshore oil field.

At the heart of this trend is a growing need for China to secure energy resources, and having three oil and gas companies at your disposal certainly makes that a lot easier. It will be interesting to watch how many other countries follow Canada's lead protecting oil and gas resources from "too much" foreign investment going forward.

Foolish takeaway
As costs grow and the demand for energy resources increases, there will continue to be consolidation across the energy industry. Government policy will continue to evolve, and Canada's recent decision gives investors much to consider for the near future. There are plenty of small U.S. independent oil and gas producers that may well be the next buyout targets.

One such independent may be SandRidge Energy. If you are unsure about the future of this emerging oil and gas junior, and are looking to find out more about its strengths and weaknesses, you should view this brand new premium report detailing SandRidge's game plan and what to expect from the company going forward. To get started -- click here!

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Fool contributor Aimee Duffy has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services recommend Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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