CNOOC Arm in Advanced Talks to Buy Awilco

WARSAW (The Wall Street Journal via Dow Jones Newswires), June 20, 2008

A consortium led by the oil-services arm of China National Offshore Oil Corp. (CEO) is in advanced talks to buy Norwegian oil drilling contractor Awilco Offshore ASA (AWO.OS) in a deal that could be valued at more than $2 billion, according to people familiar with the situation.

The potential deal marks a major attempt by China to break into the global oilfield services industry, which is experiencing an unprecedented boom as petroleum prices hit new highs.

The world's largest oil companies are pouring billions of dollars into exploration, creating huge demand for oilfield service providers like rig operators, seismic contractors and engineering companies. Some drillers are able to lease out their most advanced equipment to the majors at rates of $600,000 a day.

A lack of capacity in the world's biggest shipyards, where berths are booked up years in advance, has led to a shortage of some classes of rigs. Drill services companies that want to expand their fleets often find it easier to buy smaller rivals than order new equipment. That has led to a wave of consolidation that has been particularly pronounced in China, which is itself emerging as a major rig-builder. Awilco has contracts to build some new rigs at the Yantai Raffles shipyard in eastern China.

Under the scenario being discussed, the bulk of the Awilco acquisition's funding would come from the oil services arm, China Oilfield Services Ltd., or COSL. Partners would take smaller stakes in the company, according to the people familiar with the situation.

A chunk of COSL's portion is likely to come from proceeds raised in its $900 million Shanghai initial public offering in September last year. Credit Suisse analysts estimated in a May report that China Oilfield Services has about US$1.15 billion in cash and could generate a pool of US$3 billion for acquisition by taking on more debt.

The people involved cautioned the deal still could fall apart and a formal bid still needs approval from the company's board and the Chinese government. Awilco's current market capitalization is around $2.1 billion, meaning any offer is likely to be priced at a premium to that. The stock's price has run up in recent months on speculation about a potential bid for the driller.

Awilco is one of several Norwegian start-ups that have moved aggressively to exploit the shortage in the rig market. Created in 2005, it has a fleet of five jack-ups - offshore drilling platforms that typically operate in water depths of around 400 feet - and two accommodation units. It also has three more jack-ups and three semi-submersibles - a more advanced rig capable of working in water 750 meters deep - under construction at yards in Singapore and China.

COSL has a much larger fleet, with 12 jack-ups and three semi-submersibles. It also owns and operates support vessels, oil tankers and ships designed for seismic testing and geo-technical surveys. The company is earning more of its revenue outside China. In 2006, 17.3% of its gross revenue was earned overseas, compared with 9% in 2005.

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