CNOOC to buy Nexen for $15.1 billion in China's largest foreign deal

Mon, Jul 23 17:44 PM EDT 1 of 3 By Lee Chyen Yee and Jeffrey Jones HONG KONG/CALGARY (Reuters) - State-controlled CNOOC Ltd launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen Inc for $15.1 billion, forcing Ottawa to decide whether security concerns outweigh its desire for foreign investment in its energy resources. CNOOC, China's third-largest oil company, hopes to sell the deal to shareholders and the government with a hefty 61 percent premium to Nexen's Friday stock price. It promised to retain all employees and to make Canada home base for its Western Hemisphere operations. CNOOC is offering $27.50 cash a share for Nexen, which has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa. The initial shareholder reaction was enthusiastic. Shares of Nexen, whose board unanimously approved the deal, surged C$9.06, or 52 percent, to C$26.35 in Toronto on Monday. "You won't find a single shareholder on the entire planet, or in the solar system, who is unhappy with this deal," said David Taylor, president and chief investment officer of Taylor Asset Management. The move is the most ambitious foray by resource-hungry China into North American energy since a 2005 attempt to buy U.S.-based Unocal for $18.5 billion was thwarted by a political backlash there. Chinese companies have been among the most aggressive in targeting assets around the globe to help feed demand in the world's second-biggest economy. As for Canada, Prime Minister Stephen Harper has pushed to attract more energy investments from China. The CNOOC deal shows his efforts are bearing fruit, and Canada has more reasons to accept the deal than to veto it. "For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates, which includes the exploitation of bitumen in Alberta," CNOOC Chief Executive Li Fanrong said in a conference call. "Because we intend to be a local company as much as a global one, we also intend to seek a listing for CNOOC Ltd on the Toronto Stock Exchange." The deal is subject to a review by the Industry Ministry, which by law must decide if the takeover would bring a "net benefit" to Canada. In its favor is both CNOOC's commitments to Canada, and the fact that Nexen's operations are mostly outside Canada. CNOOC has only nine years worth of reserves based on its current production -- one of the lowest ratios among major oil companies worldwide. It said the deal would increase its proven reserves by 30 percent. "CNOOC has been seeking overseas acquisitions, as the domestic reserves are limited. But there has been many limits, things like foreign companies (being) reluctant to sell, price too high. This deal would be quite a success," said Yan Shi, an oil analyst at brokerage UOB Kay Hian in Shanghai. The move was quickly followed by another Chinese play for Canadian-owned oil assets, as Sinopec Corp said it would buy 49 percent of Talisman Energy's British unit for $1.5 billion. CNOOC already has partnerships with Nexen, once a unit of Occidental Petroleum Corp. The Canadian company recently underwent a management shake-up and has been seen for years as a potential target. Analysts had talked of Nexen as a turnaround story since Kevin Reinhart took over as interim CEO early this year. He won kudos for improving the reliability of such projects as the huge Buzzard oil field in the North Sea after years of missed production targets. "I've watched this company try to turn itself around for so long," Taylor said. I'm not saying they couldn't have done it this time, I'm just saying that some of their assets are extremely tricky and complicated and there are a lot of unknowns." Taylor said a rival bid is unlikely to emerge, given the huge premium and the fact that CNOOC is offering all cash. Nexen is one of his top 10 holdings in the IA Clarington Focused Canadian Equity Class and Focused Balanced Fund. Yet Nexen's C$6.1 billion Long Lake oil-sands development, for example, is several years behind schedule in reaching capacity production. Such persistent problems have kept the stock well below the company's net asset value, said Norman MacDonald, vice president and portfolio manager at Invesco Trimark. REGULATORY QUESTIONS CNOOC made its first, tentative Canadian investment in 2005, paying C$122 million ($120.8 million) for a 16.7 percent share of the then-private oil sand developer MEG Energy Corp. It completed a C$2.1 billion acquisition of Opti Canada Ltd in November, winning a second stake in a Canadian oil sands company and a share in Long Lake. The Canadian deals have not yet stirred the political opposition that killed CNOOC's $18.5 billion Unocal bid. Still, Canada must review any foreign investments worth more than C$330 million and can block them if it thinks a deal is not in the country's best interests. It exercised that right in 2010 when it blocked Anglo-Australian miner BHP Billiton's $39 billion hostile takeover of Potash Corp, the world's top fertilizer producer. Canada's industry minister confirmed he will conduct a review, focusing on such aspects as the effect of the deal on economic activity, the degree of participation by Canadians in the business and the impact on competition. That said, only 28 percent of Nexen's production and 11 percent of its cash flow are derived from Canadian operations, CIBC World Markets analyst Andrew Potter said. That may help CNOOC pass muster with Investment Canada. In addition, it would be difficult for Harper to quash the deal after touting investment opportunities throughout Asia. Still, Ottawa must consider the precedent such a pricey deal will set, said Gordon Houlden, head of the University of Alberta's China Institute and a former diplomat in China. "I do not believe the government would contemplate, let's say, 10 purchases of this order, which would be well within China's means," Houlden said. "If you (spent) $30 to $50 billion you could take out almost all of the largest Canadian energy companies, and I don't think that it would be the government's plan to have a wholesale transfer of ownership from Canada to China of those assets." REASONABLE PRICE FOR CNOOC According to Thomson Reuters data, the takeover would be bigger than any foreign deal completed to date by a Chinese company. Buying Nexen also would make CNOOC the operator of Buzzard, the largest oil field in the UK and the biggest contributor to Forties Blend crude. Forties is the largest of the four North Sea crude oils that form the Brent oil benchmark, and the crude that usually sets the value of dated Brent, the benchmark for pricing more than half of the world's oil. BMO Capital Markets and Citigroup Global Markets Inc advised CNOOC, while Nexen was advised by Goldman Sachs and RBC Capital Markets. CNOOC said Nexen's debts of about $4.3 billion would remain outstanding and it hoped to complete the deal by the fourth quarter of 2012. ($1 = 1.01 Canadian) (Additional reporting by Fayen Wong, Aizhu Chen, Xu Wan and Charlie Zhu in China bureaus; Claire Sibonney and Euan Rocha in Toronto; David Ljunggren in Ottawa; Writing by Jeffrey Jones, Neil Fullick and Andrew Callus; Editing by David Holmes and Frank McGurty) === SEC alleges insider trading ahead of CNOOC-Nexen deal Sat, Jul 28 05:56 AM EDT WASHINGTON (Reuters) - The U.S. securities regulator filed a complaint in court on Friday against a firm controlled by a Chinese billionaire and other traders, accusing them of making over $13 million from insider trading ahead of a bid by China's CNOOC for Canadian oil company Nexen Inc. The Securities and Exchange Commission said the federal court in Manhattan had frozen assets worth over $38 million belonging to Hong Kong-based Well Advantage, controlled by businessman Zhang Zhirong, and other unnamed traders who used accounts in Hong Kong and Singapore to trade in Nexen stock. They made trading profits of $7 million and $6 million respectively by using inside knowledge of the merger to buy Nexen shares before the announcement, the SEC says. The trading was suspicious, the SEC claims in its complaint, because the accounts used to buy the shares had 'either no history or extremely limited history" of buying Nexen shares before July 2012. CNOOC said on July 23 it had agreed to acquire Nexen for $15.1 billion, China's biggest foreign takeover bid. Shares of Nexen jumped almost 52 percent that day. The unnamed Singapore traders used accounts in the names of Phillip Securities and Citibank, while Well Advantage made its trades through accounts held at UBS Securities and Citigroup Global Markets. Neither of the Well Advantage accounts had traded Nexen shares since January 2012, and the Citigroup account had been completely dormant for over six months. Zhang Zhirong also controls China Rongsheng Heavy Industries Group Holdings, which according to a company filing in October 2010, entered a strategic cooperation agreement with CNOOC. A spokeswoman for CNOOC declined to comment. Calls to Well Advantage's office in Hong Kong were not answered on Saturday. Hong Kong's Securities and Futures Commission also declined comment while officials at the Monetary Authority of Singapore were not immediately available. The SEC does not allege any wrongdoing by Zhang, but notes that he is the controlling shareholder of a company that engages in significant business activities with CNOOC. Zhang was ranked the 22th richest Chinese person by Forbes Magazine in September 2011. But his net worth fell by more than half in the past year to $2.6 billion in March 2012 as shares of Rongsheng tumbled. The stock ended at HK$1.4 on Friday against an IPO price of HK$8.0 fixed in November 2010.

Well-timed bullish bets in Nexen options ahead of the announcement also raised eyebrows among some market watchers on the day the deal was announced. "Well Advantage and these other traders engaged in an all-too-familiar pattern of misusing inside information to place extremely timely trades and profit handsomely from their illegal acts," said Sanjay Wadhwa, deputy chief of the market abuse unit in the SEC's enforcement division.

In addition to freezing the traders' assets and directing them not to destroy any evidence, the SEC is seeking a judgment "ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and permanently bar them from future violations," according to a statement. The SEC is cracking down on insider trading, it says, having brought 57 insider trading actions in the financial year 2011 against 124 individuals and entities, a nearly 8 percent increase in the number of filed actions from the prior fiscal year. Wadhwa acknowledged in his statement "the challenges of investigating misconduct in the U.S. by trading accounts located overseas," and the SEC will have to work with regulators in Hong Kong and Singapore where the alleged insider trading took place. (Reporting by Aruna Viswanatha, additional reporting by Lawrence White, Kelvin Soh and Alison Leung in HONG KONG; Rachel Armstrong in SINGAPORE; editing by Raju Gopalakrishnan) ============