DBRS calls net benefit of Nexen takeover by Chinese firm ‘somewhat mixed’

The net benefit of a $15.1-billion takeover of Nexen Inc. (TSX:NXY) by a Chinese company is “somewhat mixed” because the deal offers only limited direct financial benefits but may help trade relations, says the DBRS debt-rating agency.

A DBRS report released Wednesday says the deal is not financially necessary for Nexen, which is already a strong company with good access to capital markets, but an approval could bolster Canada’s relationship with China and open up new markets.

James Jung, a senior vice-president at DBRS and lead analyst on the report, said the investment by the Chinese National Offshore Oil Company could be a catalyst for further investment in the sector.

“It will be positive in terms of the in-flow of capital to speed up our oilsands development,” Jung said, adding that it could help Canada-China relations.

“Having a Chinese company coming in will be good for getting access to Asia.”

However Jung noted that more multinational companies looking to invest in the oilpatch carries risks and downsides and the Nexen deal, because of its size, is being watched carefully as a possible precedent.

“Our crystal ball is telling us that there will be other multinational companies and state-owned entities that could follow suit and acquire the major interests of other Canadian entities,” he said.

And, he said, some deals haven’t worked out as planned.

“Entities that have made acquisitions in Canada have failed to live up to their promises,” he said.

Ottawa is reviewing the $15.1-billion takeover by CNOOC under the Investment Canada Act, which says large deals must be of “net benefit” to Canada.

The federal government essentially killed BHP-Billiton’s hostile takeover bid for Potash Corporation of Saskatchewan (TSX:POT) when it said the deal didn’t meet that standard.

Nexen shareholders voted to approve the takeover last week.

Both Nexen and CNOOC have been seeking to allay concerns over the deal and trumpet its potential benefits.

Nexen has said that CNOOC will keep the Nexen name and expand the role of the company’s Calgary headquarters to manage not just Nexen’s assets, but also some $8 billion of the Chinese company’s other assets in North and Central America.

Nexen interim chief executive Kevin Reinhart has also said that if the deal is approved CNOOC would seek a listing on the Toronto Stock Exchange and carry on Nexen’s social responsibility programs in Canada and around the world.

CNOOC has offered $27.50 per share in cash, however Nexen shares have traded short of that mark, suggesting that some investors believe there is a chance the deal will not be approved.

Concerns have been raised in Ottawa by both sides of the House of Commons about the deal.

Alberta Tory MP Ted Menzies has said he’s been getting a lot of negative feedback from constituents about the takeover by a state-owned Chinese firm.

The Canadian Security Intelligence Service report for 2010-11 also warned last week that when companies with links to foreign intelligence agencies or hostile governments try to acquire control over strategic sectors of the Canadian economy, it can represent a threat.

Nexen and CNOOC are already partners in the Gulf of Mexico and at the Long Lake oilsands project near Fort McMurray, Alta.

While CNOOC’s deal for Nexen may be the largest deal so for in the Canadian oilpatch involving a Chinese company, other Chinese firms have been active in the sector.

Talisman Energy has signed a deal to sell a 49 per cent interest in its UK division to Chinese firm Sinopec Corp. for $1.5 billion, while Athabasca Oil Sands Corp. sold its remaining 40 per cent stake in the MacKay River oilsands project to joint-venture partner PetroChina.

Last year, Sinopec bought conventional oil and gas-focused Daylight Energy Ltd. Sinopec also has a nine per cent interest in the Syncrude oilsands development north of Fort McMurray, Alta.

Nexen shares closed up 18 cents at $24.91 on the Toronto Stock Exchange on Wednesday.