Analyst: CNOOC-Nexen Deal Seen as Value Destructive

CNOOC's acquisition offer for Canadian exploration and production company Nexen could be rather value-destructive, given the high execution risk and hefty premium, an analyst told Rigzone in an email Thursday.

However, the company's share value has been eroded sharply in the past three to four years due to poor execution results and slow production growth.

It's also not certain whether this deal will be approved given the record deal value and recent collapse of the PetroChina-Encana deal for $5.5 billion, which was called off, possibly due to lack of approval from the Canadian government.

China-based CNOOC unveiled plans Tuesday to acquire Nexen for $15.1 billion in cash, a 61 percent premium to Nexen's July 20 closing price of CAD17.29 ($17.09) earnings per share. The acquisition would be funded in cash and external financing, and is subject to approval by the Chinese, Canadian and U.S. governments and approval by Nexen shareholders.

The deal also is likely to boost CNOOC's proven reserves by 30 percent and production by 20 percent.

Armada Oil President and CEO Jim Cerna said the CNOOC acquisition of Nexen was more of an investment strategy versus a resource grab, as he sees most of the oil being used in local markets versus flowing to China.

"The deal will most likely raise total world oil production and may have a very slight effect on world oil prices," Cerna commented in a statement to Rigzone.

Cerna said the CNOOC acquisition would enable new technologies and research and development to optimize the total extraction of oil or recoverable oil.

"You can see when capital is deployed, R&D and technology to these shale formations – as we've seen in the Bakken and the Niobrara development – the productivity of the wells have been increasing every year and we're learning how to extract more oil from the same reservoir," Cerna commented.

China also is very interested in rare earths, which might be the next trending sector, as U.S. rare earths are used in new energy production like solar panels, Cerna noted.

"As long as they are allowed to purchase foreign companies that are diversified (geographically), then this could mark the beginning of an acquisition trend of diversified international oil companies," Cerna said.

Dow Jones reported Friday that CNOOC is 'fully prepared' to enter discussions with regulatory bodies and expects to receive approvals for its planned acquisition of Canada-based exploration and production company Nexen.