The recent purchase of Nexen (NYSE:NXY) by a Chinese oil and gas company has unleashed the typical torrential flood of nationalism in the United States that is usually associated with this type of acquisition. This reaction is especially puzzling considering that Nexen is a Canadian oil and gas company with only minor operations in the U.S.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
On July 23, 2012, CNOOC Limited (NYSE:CEO) announced the purchase of Nexen for $27.50 per share in cash. The price represented a premium of 61% over the price of Nexen on the previous day.
Who is CNOOC Limited?
CNOOC Limited is an oil and gas company headquartered in Hong Kong and is a subsidiary of the China National Offshore Oil Corporation, a state-owned enterprise of the People's Republic of China.
SEE: A Guide To Investing In Oil Markets
Nexen reported production of 207,000 barrels of oil equivalent (BOE) per day in the second quarter of 2012 and proved reserves of 900 million BOE. The company's assets are spread mostly across Canada, the U.S., the United Kingdom and West Africa.
More than 50% of Nexen's production comes from the North Sea, with the Buzzard development being the principal source of this production. Another 30% of production is generated from projects in Canada, including the oil sands and several other areas. Nexen also owns a 20% interest in the Usan field located offshore of Nigeria and expects net production from here to eventually reach 36,000 barrels per day.
United States' Assets
Nexen reported production of 16,000 BOE per day from the U.S. in the second quarter of 2012. Despite the low production from here, the company has stakes in several projects with significant potential. Nexen owns 20% of the Appomattox prospect, operated by Royal Dutch Shell (RDS-A, RDS-B). The company does not expect first oil production from here until 2017 or 2018, but estimates that the discovery has gross contingent recoverable resources of 215 million BOE.
SEE: Oil And Gas Industry Primer
The political response in the U.S. to the deal was immediate and predictable with several politicians calling for the Obama Administration to block the deal. The opposition is focused on the royalty relief that Nexen has on some leases in the Gulf of Mexico, which may be covered under the Deep Water Royalty Relief Act. This law was passed in 1995 to "promote development" in the Gulf of Mexico when oil prices were much lower.
Edward Markey, a congressman from Massachusetts, called the deal a "massive transfer of wealth" in a letter to Treasury Secretary Timothy Geithner. Geithner is chairman of the Committee for Foreign Investment in the U.S., which is charged with reviewing the National Security implications of foreign investments in U.S. companies. Markey urged Geithner to block the purchase unless Nexen agreed to waive its royalty relief or sell the leases.
It's difficult to believe that the ownership of a relatively insignificant amount of oil and gas assets in the Gulf of Mexico by a company controlled by the Chinese government will threaten the national security of the U.S. Will the Chinese government use an oil and gas platform to stockpile ammunition and mass troops prior to an invasion of the Gulf Coast?
The Bottom Line
The opposition to a minor purchase of U.S. assets by a foreign government makes good headlines but little sense in the global world that we live in. Investors should consider that excess cash flow earned by foreign companies is recycled into our economy through the purchase of goods and investment in U.S. treasury securities. The final item to consider is that the Chinese may be buying oil and gas assets at a generational peak in commodity prices, and repeating the same mistake that Japan made when buying marquee U.S. real estate assets in the late 1980s.
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
Stock AnalysisAs a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>