If Chinese oil company CNOOC Ltd. tries to trump Chevron Corp.'s $16.7 billion deal to buy Unocal Corp. -- and people familiar with situation say an offer might come this week -- the move would say much about the rising tolerance for risk by Chinese energy companies.
Numerous stock analysts have questioned the rationale for such a bid, saying it would bury CNOOC's balance sheet in debt. Non-executive directors at publicly listed CNOOC also have harbored reservations, causing a bid to be postponed once already. And since it first announced on June 7 that it might challenge Chevron's offer, CNOOC, a unit of China National Offshore Oil Corp. that is listed on the stock exchanges in New York and Hong Kong, has seen its share price fall 2 percent while the stock prices of fellow state-owned Chinese oil companies Sinopec Corp. and PetroChina Co. have risen 4 percent and 8 percent, respectively.
CNOOC's American Depositary Shares closed $1.45 lower at $52.70 yesterday as Unocal's common stock rose $1.38 to $64.85 a share.
So what is motivating CNOOC? People who advise the company say its new and ambitious chief executive, Fu Chengyu, is driven foremost by bread-and-butter commercial objectives: a need to expand the company's energy reserves and to secure Asian gas fields that can feed the receiving terminals the company is building along China's southern coast. But what distinguishes CNOOC from many of its global competitors is its controlling shareholder: the Chinese government.
Analysts say that Beijing's worries about its ability to fuel China's rapid economic expansion could have given CNOOC an implicit mandate, as well as explicit state financial support, to attempt an acquisition that most international oil companies of CNOOC's size wouldn't dare pursue. CNOOC probably would have to offer more than $18 billion to top Chevron's bid, an amount almost as high as CNOOC's $22 billion market capitalization.
CNOOC already has prepared a bid for the U.S. company but needs to hold a board meeting before making a final decision to proceed, according to two people familiar with the matter. They declined to comment on the size of the potential bid or to say how it would be funded. But an earlier bid for Unocal that CNOOC withdrew in April for reasons CNOOC hasn't disclosed, was all cash, leading analysts to expect that a renewed bid would look similar.
Chevron, based in San Ramon, Calif., says it is confident it will be able to consummate its proposed deal, which still must gain the approval of Unocal shareholders. A shareholder vote hasn't been scheduled but is likely to occur within a few weeks.
Managers of U.S. hedge funds that hold Unocal stock say that if CNOOC offers to buy Unocal for about $70 a share, they expect Chevron to raise its cash-and-stock bid to $66 a share from $61.75 a share. The hedge fund managers said such a bid, even if lower than CNOOC's, would be attractive because a Chevron deal wouldn't be subject to the possible U.S. regulatory reviews that a Chinese deal would entail and because they see Chevron stock as undervalued.
CNOOC has long been seeking to expand its oil and gas reserves, a crucial indicator of any oil company's long-term health. It has been exploring off the coast of China but hasn't made enough significant discoveries to meet the company's ambition to become a major player in Asia. Fu was quoted in an interview with a Chinese news service last year saying: "Our current reserve level is still too low to guarantee the sustainable development of the company."
The only other way for CNOOC to increase its reserves would be to acquire them from another company. "This deal is motivated more by corporate strategy than national energy security," said Wang Zhen, a professor at China University of Petroleum.
But energy security clearly is playing a role, too. Like their counterparts in many capitals around the globe, policymakers in Beijing equate ownership of oil and gas fields with energy security. Never mind that industry experts and even some CNOOC officials privately concede that Chinese ownership of oil fields abroad won't make much difference to China's energy security. Oil is fungible: Overall supply, rather than which country owns a field, determines the all-important issue of price. But policymakers in China don't always view it that way, and, as such, appear willing to back Chinese acquisitions with loans from state banks.
Numerous analysts have downgraded their ratings for CNOOC's stock as a result of its interest in Unocal, saying the company would need billions of dollars of credit that would leave it with massive interest payments for years to come.
The financial burdens of an acquisition undoubtedly crossed the minds of CNOOC directors, too. CNOOC had been in negotiations to buy Unocal earlier this year and promised to make a formal offer, according to public filings made by Chevron, along with people familiar with the matter. But CNOOC's chief executive, Fu, called Unocal, of El Segundo, Calif., on April 2 to say the company would hold off on making a bid, opening the way for Chevron to strike its deal.
Qiu Haixu in Beijing and Russell Gold in Dallas contributed to this report.