Nexen deal comes back to haunt CNOOC

Share

CNOOC Ltd.'s financial performance is being hurt by its purchase of Nexen Inc., a situation exacerbated by its pledge to Ottawa that it will not reduce its newly-acquired Canadian staff, the Chinese company's own leading analyst says.

Earlier this year, CNOOC completed its $15.1-billion (U.S.) takeover of the Calgary-headquartered energy producer, consummating the single largest foreign takeover by a Chinese company after a long review by the federal government.

As part of that, CNOOC made a series of undertakings to the Canadian government. It promised to keep its North American headquarters in Calgary, make greater long-term investments in the oil sands and list on the Toronto Stock Exchange. So far, the state-owned oil company has made good on those and has been publicly bullish on its new purchase. In September, CNOOC chief executive Li Fanrong said: "Everything is meeting our expectations. We are, right now, in the process of a discussion on how to maximize our investment."

But in an interview in Beijing, Chen Wei Dong, CNOOC's chief energy researcher, outlined the difficulties the company has encountered since taking on Nexen, whose key foothold in the oil sands, its troubled Long Lake operation, is still after five years in production showing no sign of operating at its full capacity of 72,000 barrels of bitumen per day.

CNOOC company-wide return on investment "on average surpasses 11 per cent," compared to just 3.5 per cent for the Nexen assets, Mr. Chen said. "So that is a problem. That is a concern," he said.

In particular, he raised "the problems of human resources." Nexen has approximately 3,200 employees around the world, with about half in Canada. Mr. Chen recounted previous energy mega-mergers, including those between Chevron and Gulf, Exxon and Mobil, BP and Amoco – each was followed by large-scale layoffs in the acquired company.

By contrast, CNOOC in taking over Nexen pledged to the Canadian government, "no reduction in manpower," he said. "I myself am unable to see how to improve the efficiency of Nexen if we continue this route," he said.

Mr. Chen occupies an unusual role within CNOOC. Though he works for the company, he does so as a researcher. In that sense, his comments are, in some measure, his own; the company says he does not speak for it. He also hastens to point out that CNOOC has "made promises and we will honour the promises we have made." (When the government approved the transaction a year ago, the company said it "will seek to retain Nexen's current management team and employees.")

No one at Nexen's corporate headquarters in Calgary was available to comment on Mr. Chen's assertions.

Still, his comments provide insight into how Nexen's new owners may be reconsidering their views of deals. Previous takeovers of major Canadian companies have been accompanied by bold promises that were rescinded when circumstances changed, often at the cost of jobs. The federal government took legal action in one instance, suing U.S. Steel Corp. in 2009 for breaking commitments to protect employment after the takeover of Stelco Inc.

CNOOC's troubles with Nexen are set against a broader pivot by China's energy giants, which have been at the heart of a pan-global buying spree. After a decade of 32 per cent annual compound growth in foreign mergers and acquisitions, China spent $64.6-billion (U.S.) on outbound acquisitions in 2012, according to a recent Accenture report.

Virtually all of those deals have come from major state-owned enterprises, and two-thirds of the natural resources spending in the past decade has been on buying up oil and gas. In part, that was to fulfill a mandate to secure barrels for an energy-thirsty rising superpower.

Now, that mandate is changing. "It's fair to say that Chinese companies, especially the [state-owned enterprises] in the process of expanding their scale, we have to learn how to improve our efficiency and competitiveness in the global market," Mr. Chen said.

He pulled out a printout of a recent report from Accenture, titled "The Dragons are on the Move," that offers suggestions to maximize efficiency from new acquisitions. He underlined sections that say Chinese companies have, until now, not focused on "developing an integration road map" to create business value from those deals.

Chinese companies are increasingly attuned to the financial impact of failing to address those matters, he said.

The Nexen takeover took place on Feb. 26, 2013, and had an immediate impact on CNOOC's results. In the first half of 2013, CNOOC's production rose 23 per cent, but operating expenses climbed nearly 50 per cent. Analysts project the company's earnings growth will be flat in 2013, excluding extraordinary items.

Mr. Chen offered hope for future investment in Canada, particularly in a liquefied natural gas export project CNOOC is now pursuing in northern British Columbia. He likened the switch from oil to natural gas to the switch from coal to oil: It will be a market transformation that will provide decades of demand for gas, he said, defying the critics who suggest Canada is moving too slowly to win its share of the global LNG market.

"The International Energy Agency predicts that the 21st century is the golden age for natural gas. I endorse this point," he said.

Oil has been the king of fossil fuels for over a century, he said. If gas is its successor, its reign is also likely to be lengthy. "So what would be the concern for Canada?" he said. "There is no reason for worry."

With a report from Kelly Cryderman in Calgary.