Tickers in this Article: CEO, NXY, BHP, POT
Canada and China have had an interesting relationship over recent years. While Canada has certainly appreciated China's boundless appetite for its ores, agricultural products and energy exports, it has not been quite so appreciative of the efforts of Chinese companies to acquire operating assets in the country. So while CNOOC's (NYSE:CEO) announced intention to acquire Nexen (NYSE:NXY) makes sense on many levels, it may not be a total certainty that the deal goes through.

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The Deal That May Be
On Jul. 23, 2012 before the open, major Chinese oil company CNOOC announced that it had reached an agreement to acquire Canada-based energy company Nexen for $27.50 per share in cash. While the announced deal value works out to over $15 billion, this does not include the additional $4.3 billion in debt that CNOOC will be taking on as part of the deal. Nevertheless, at $27.50 per share, Nexen shareholders would be getting a 61% premium to July 20's close.

SEE: Analyzing An Acquisition Announcement

A Needed Boost for CNOOC
While CNOOC has had a lot going for it as an investment option (including relative immunity to price regulations that can significantly impact PetroChina (NYSE:PTR)), production growth has emerged as a meaningful issue of late. This deal for Nexen could go a long way towards addressing that.

Nexen is a very oil-heavy energy company (about 90% of reserves and 85% of production), and brings about 900 million barrels of proved reserves to the table, as well as 1.1 billion barrels of probable reserves. Only about 10% of the company's production comes from Canada (Western Canada, mostly), with a large amount (more than 40%) coming from the North Sea.

According to news reports around the deal, CNOOC believes that this deal should boost production by as much as 20% and proved reserves by 30%. It should be noted, though, that this isn't a risk-free proposition for CNOOC. Not only is there deal risk, but Nexen has been undervalued lately due in part to production/execution issues at Nexen. While these do seem transient (or at least fixable), CNOOC shareholders shouldn't fool themselves into thinking that this is simply a by-the-numbers "buy it and prosper" deal.

While Canadians Say Yes?
There is a real risk that Canadian regulators will turf this bid. Regulators in Canada are sensitive to foreign-based corporations acquiring controlling stakes in major resource companies. Not only was there the much-publicized resistance to BHP Billiton's (NYSE:BHP) proposed acquisition of Potash (NYSE:POT), but other, smaller deals, have been discouraged as well.

There is reason to think that this deal may be different. First, CNOOC seems to be willing to go out of its way to alleviate concerns. The company has pledged to retain management and employees in Canada, will maintain headquarters in Canada and will list its own shares on the Toronto exchange. It's also worth noting that CNOOC has successfully dealt with Canada's regulators in the past - buying OPTI Canada about a year ago.

The Bottom Line
With CNOOC's recent production at the lowest levels since the first quarter of 2010, there was a lot of "do something" pressure and the sell-off in the energy sector made an acquisition seem pretty reasonable. Although CNOOC is paying a high premium, $27.50 per share seems pretty fair relative to the net asset value of Nexen today (assuming, of course, that oil prices do not crash and stay low for many years). Moreover, if CNOOC can fix Nexen's execution issues, the premium won't seem so bad in the years to come.

SEE: What Determines Oil Prices?

Perhaps this deal will light a fire under stocks like Denbury (NYSE:DNR), Whiting (NYSE:WLL) and Continental Resources (NYSE:CLR), as it should serve as a reminder that there's still real value in oil-heavy energy companies. Nevertheless, CNOOC was what you might call a "motivated buyer" and there are still risks to the sector from the near-term global economic outlook, even if the long-range outlook for energy is still quite strong.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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