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August 6, 2012

China's Next Two Energy Takeover Targets in North America


By Jason Simpkins of Wall Street Daily

CNOOC Ltd. (NYSE: CEO) just made some serious waves in the energy market with its $15.1 billion bid for Canada’s Nexen Inc. (NYSE: NXY). But that takeover – the largest overseas acquisition ever made by a Chinese company – is just the beginning.

Expect plenty more takeovers and partnerships in the months ahead, especially after Beijing’s mandate that state-owned energy companies stock up on foreign technology and expertise.

You see, China has the world’s largest deposits of shale gas, equal to about one-fifth of the world’s total reserves. But it lacks the ability to exploit them.

China has drilled only 50 shale gas wells in the past year, compared to 1,300 drilled in the United States eachmonth. And while the United States pumped 142 billion cubic meters of natural gas in 2010, China’s on track to produce just 6.5 billion cubic meters per year by 2015.

Still, the Red Dragon is determined to narrow that gap, having set a goal of producing more than 60 billion cubic meters of natural gas – about 10 times the current amount – by 2020. To achieve that goal, China’s central government has instructed its state-run oil companies to aggressively pursue foreign targets.

CNOOC has been among the most active participants, along with Sinopec Group and China National Petroleum Corp., which often uses PetroChina (NYSE: PTR) as its proxy.

Together, these companies accounted for more than two-thirds of the $100 billion of overseas energy assets China targeted over the past four years.

So where will they strike next?

Well, there are only so many companies with the kind of reserves and expertise China’s looking for. So the next time a Chinese oil major makes headlines with a huge acquisition, it’s bound to involve one of these two companies.

Takeover Target #1: Chesapeake Energy (NYSE: CHK)

Chesapeake makes for a prime takeover target because it has a huge portfolio of choice assets and its stock has tumbled 46% in the past year. Furthermore, investors may welcome a change in leadership, since Chesapeake’s management has proven somewhat dubious.

The company has proven reserves of 3.13 billion barrels of oil equivalent. It’s also the largest onshore leaseholder of shale oil fields in the United States, with approximately 14 million net acres of land under lease. That includes a top two position in some of the country’s largest shale formations, including Barnett, Haynesville, Marcellus, Wolfcamp, Bone Spring, Eagle Ford and Utica.

That creates a very enticing situation for any Chinese company looking to develop expertise in shale gas drilling.
Not to mention, two of China’s Big Three – PetroChina and CNOOC – already have existing relationships with Chesapeake.

For instance, PetroChina CEO, Zhou Mingchun, recently told Bloomberg that while there has been “no contact with Chesapeake in terms of mergers and acquisitions… both sides have paid attention to each other.”
And CNOOC has already paid Chesapeake nearly $3 billion for several assets, including a one-third stake in the Eagle Ford shale formation in Texas. That deal was spurred by Chesapeake’s need to raise capital after taking on more than $13 billion in debt to acquire assets at a time when natural gas prices were much higher.
Chesapeake has said that it could face a cash shortfall as early as next year if natural gas – which accounts for 83% of the company’s reserves – doesn’t bounce back soon. So there’s a good chance it would be open to Chinese interests.

Granted, it may be difficult for a Chinese company to get the takeover approved by regulators in the United States. But seeing our neighbors to the north reap the spoils of Chinese investments is certainly a huge incentive to cooperate.

Takeover Target #2: EnCana Corp. (NYSE: ECA)

Speaking of Canada, the country has rolled out the red carpet for Chinese investors. Besides CNOOC’s acquisition of Nexen, PetroChina has sunk $4 billion into Canadian shale plays.

The next likely target is EnCana.

EnCana is a giant Canadian energy player with a market value of about $16 billion, but it’s been hit hard by the fall in natural gas prices. The company posted a $1.48 billion loss in the second quarter and warned it could face additional impairment charges due to the weak natural gas market.

EnCana also has significant U.S. holdings, including the Tuscaloosa Marine shale stretching across Mississippi and Louisiana, the Utica/Collingwood formations in Michigan, the Eaglebine play in East Texas, and the Mississippian Lime in Oklahoma and Kansas.

PetroChina has already shown interest. The company was prepared to dish out $5.4 billion in June for a 50% stake in EnCana’s Cutbank Ridge shale gas play. But the two companies couldn’t come to terms on an operating agreement. I’m convinced that another deal will soon be in the works.

Again, there could be some political complications. But if it’s technology and know-how that China’s after, it’ll have to target major players. Smaller firms just won’t have the fracking expertise that Chesapeake and EnCana offer.

Bottom line: Investors should keep a very close eye on both of these companies, as mergers and acquisitions offer terrific opportunities for huge gains in a short period of time.

Nexen shares, for example, have soared 45% in just two weeks after CNOOC’s bid.


Courtesy Louis Basenese at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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