July 29th, 2008 | Caijing Magazine CNOOC Eyes Global Market, Deep Sea Oil
The pending buyout of a Norwegian oil firm is giving China National Offshore Oil Corp. a lot of international options.
By intern reporter Zhang Boling
China’s largest ever acquisition of a foreign company has given energy developer China National Offshore Oil Corp. (CNOOC) a chance to tap deepwater resources at home and expand in new markets abroad.
The proposed US＄ 2.5 billion buyout of the Norwegian oil services company Awilco by CNOOC subsidiary China Oilfield Services Ltd. (COSL) (SSE: 601808, HKSE: 02883) is expected to open access to newly discovered oilfields in the deep waters of the South China Sea.
The COSL-Awilco agreement announced July 7 would be “the largest overseas acquisition made by a Chinese company,” said a person close to the deal.
Awilco’s directors have recommended shareholders approve the sale, which is expected to close in September or October. Beijing’s chief economic planner, the National Development and Reform Commission, gave its blessing on July 28.
COSL’s pending victory has given its CNOOC bosses a reason to cheer in the wake of failed efforts to acquire U.S. oil giant Unocal in 2005 and Russia’s STU, a unit of the Russian oil company TNK-BP, in January. Those attempts were blocked by the U.S. and Russian governments, respectively.
CNOOC’s fortunes may have turned with the Awilco deal. Now, analysts and company officials say, cash-rich CNOOC has the confidence needed to continue searching for appropriate purchase targets overseas.
“Our long-term goal is to become a world class oilfield service provider by 2020,” said COSL Vice President Zhong Hua on July 7. “We can only reach the goal through acquisition.”
COSL approached Awilco about a deal in January, a source told Caijing. At the end of March, COSL President Yuan Guanyong announced at a conference that “there has been a target” found as a result of the company’s decision to grow through overseas acquisitions.
Qiu Xiaofeng, an analyst at Merchant Securities, said the price may have been too high. The 85 kroner in cash per Awilco share that COSL agreed to pay represents a 19 percent premium over the stock’s July 4 closing price. Qiu said Awilco’s net assets are worth around US＄ 500 million, or just one-fifth what COSL offered.
But Zhong said the deal would bring special benefits to COSL, such as access to Awilco’s customers.
COSL’s acquisition would create the world’s eighth largest fleet of oil rigs, according to Awilco, with 34 rigs operating or under construction, and growth opportunities in most international markets.
The takeover would boost COSL’s drilling rig fleet and provide open markets in Australia, Norway, Vietnam, Saudi Arabia and the Mediterranean region.
Awilco owns five jack-up rigs and two accommodation units. It also has three jack-up drilling rigs and three, semi-submersible drilling rigs under construction, which are expected to go into operation by 2009. Awilco also holds options for construction of another two, semi-submersible drilling rigs.
But analysts think the most valuable part of the deal is Awilco’s deepwater drilling capacity. According to Shan Lianwen, a senior economist at CNOOC, COSL’s rigs can reach depths of no more than 500 meters. Awilco’s semi-submersible rigs, however, can reach 760 meters. Moreover, Awilco’s construction options are for rigs designed to operate in 1,500 meters of water.
Deepwater access would give COSL the ability to expand oil and gas exploitation in the South China Sea, analysts said.
China’s interest stems from CNOOC’s 2006 discovery of a giant gas field in the South China Sea with proven reserves of about 100 billion cubic meters. The find was China’s first, deepwater discovery and could boost the country’s total gas reserves by as much as 7 percent, turning the region into a Chinese version of the North Sea or Gulf of Mexico.
CNOOC so far has been unable to drill in the depths of the South China Sea independently, although it has signed contracts for joint projects with foreign firms such as Canada’s Husky Energy.
Shan said deepwater capacity will help CNOOC push forward to new areas for oil and gas exploitation, and make the South China Sea one of China’s major sources of oil and gas.
The Awilco deal is expected to proceed smoothly — unlike CNOOC’s 500 million yuan bid for STU, which was launched in 2006 and rejected by Moscow two years later.
Analyst Qiu said retaining Awilco’s senior experts could be the biggest, post-takeover challenge for COSL. To that end, COSL has pledged it would neither cut jobs nor radically change Awilco’s business operations.
But a source told Caijing that COSL officials have already made certain that the Awilco buyout would be approved by the Norwegian government. At the same time, COSL’s plan has won support from the Chinese government and major shareholders.
Analysts also think COSL should have no trouble financing the takeover. It has 200 million yuan cash and plans to get bank loans to finance the rest. Current negotiations involve several potential lenders.
COSL reported a 2007 net profit of 2.2 billion yuan on 9.2 billion yuan in sales, as well as 23 billion yuan in assets and a 25 percent percent liability ratio.