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Nexen deal sets new benchmarks for energy stocks

OPTI Canada and Nexen's Long Lake project in Alberta

China's largest integrated oil producer announced plans to acquire Calgary-based Nexen Inc. for $15.1-billion (U.S.) in cash Monday, a bid that would set new valuation benchmarks in the Canadian oil sector and push stock values higher.

The China National Offshore Oil Corporation, CNOOC, has agreed to buy all outstanding shares of Nexen at $27.50 per common share, a 61 per cent premium to Friday's closing price.

Nexen shares are trading more than 50 per cent higher Monday, but the S&P/TSX Energy sub index is only 0.35 per cent positive, limited by intensifying credit-related anxiety in Spain and Italy.

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Canadian research analysts expressed optimism that CNOOC's bid signalled a bottoming of stock values in the energy sector. "We believe that it is a material transaction for the energy space itself," writes GMP's Ryan Savage, and "the appetite for undervalued companies remains quite strong."

The bid implies higher stock prices for the Canadian equity sector as a whole, "57 per cent potential upside for Talisman and 20 per cent for CNQ" according to Canaccord Oil and Gas Analyst Phil Skolnick.

The acquisition is a significant transaction for CNOOC, which had a market capitalization of $90-billion as of Monday's closing price in Hong Kong. The deal highlights the Chinese government strategy of securing supply of resources to support the country's future economic growth.

Investors were reluctant to add to holdings this morning in light of deteriorating financial conditions in Europe. When sentiment improves, however, the revaluing of Canadian energy stocks in light of the rich premium paid for Nexen Inc. is likely to result in strong performance.

Send your questions about CNOOC's bid for Nexen to businesscommunity@globeandmail.com, along with your name, age, city and province. The Globe will pose the best questions to our panel of experts and publish their responses.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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