CNOOC to decide on Unocal bid this week
(Agencies)
Updated: 2005-06-22 08:49

SINGAPORE - China's state-run energy firm CNOOC is getting heaps of advice from financial markets, its rival and U.S. politicians -- all urging it not to challenge Chevron's $16 billion bid for Unocal.

The offices of Unocal Corporation at 2141 Rosecrans Avenue in El Segundo, California near Los Angeles pictured June 18, 2003. Two U.S. congressmen have asked the Bush administration to review and possibly block any effort by China's CNOOC to acquire Unocal Corp. The move comes amid reports that CNOOC, China's third largest oil group, was set to announce a counter-offer to trump California-based Chevron Corp's $16-billion bid for Unocal. [Reuters]

But with a board meeting scheduled this week, it's still not clear whether directors of the third-largest Chinese oil and gas producer will support a bid, a source close to the process told Reuters on Tuesday.

"A decision will be made this week, but definitely not today," said the source, who asked not to be identified. According to media reports, CNOOC is poised to lodge a counter-bid because a valuation report on U.S. producer Unocal by CNOOC's independent advisers, including investment bank Rothschild, could favor such a move.

If the deal goes through, it would be the biggest ever overseas acquisition by a Chinese firm.

Most watchers say a counter-bid would harm CNOOC because of high costs and political obstacles it faces in the United States. Investors have already been penalising CNOOC by dumping its shares. It used to be an investor favorite because of its high-growth prospect and low-cost structure.

Research reports from several investment banks this month say a counter-bid may be a disaster to CNOOC as it would dampen its earnings prospect or lead to a mountain of debt at the firm.

Meanwhile, California-based Chevron is going all-out to prevent it from buying Unocal in its home turf. Chevron certainly has stronger financial muscle to win a bidding war.

The political climate is also stacking up against CNOOC. Two California-based lawmakers have urged the Bush administration to review and possibly block any bid by CNOOC.

By contrast, U.S. antitrust authorities quickly approved Chevron's planned purchase of Unocal, just two months after the deal was announced.

Chevron won a race against several oil companies, including CNOOC, to sign an agreement in April to buy Unocal, which has an enviable portfolio of oil and gas assets in Asia.

It is becoming increasingly difficult for CNOOC and Chevron to find unclaimed reserves.

CNOOC, with over $1 billion in overseas investment, aspires to become a major regional liquefied natural gas producer. It made a last-minute decision not to bid for Unocal in the face of opposition from some independent board directors.

CNOOC's original planned offer was more attractive than Chevron's $16.4 billion bid -- structured as 75 percent in Chevron stock and the rest in cash -- plus assumption of $1.6 billion in debt.

Despite Chevron's winning bid, CNOOC said as recently as this month it was still considering a counter-offer.

Industry sources say CNOOC's new management led by chairman Fu Chengyu is eager to make their marks and to boost the domestic ranks of CNOOC, now a distant number three after PetroChina and Sinopec

Although it has kept its options open, analysts say a rival-bid is unlikely given the $500 million break-up fee CNOOC needs to pay Chevron on top of a sweetened price tag needed to trump Chevron's deal.

CNOOC may need to pay nearly $20 billion to lure Unocal shareholders, which -- barring further increases in oil prices for a few more years -- would undermine CNOOC, analysts say.

"I have a 50:50 view on oil prices. If they keep increasing, CNOOC's bid should be a smart one," said Clive Zhang, chief investment officer at Partners Capital Asset Management, which does not hold CNOOC shares.

If CNOOC was to make an all-cash bid, its debt ratio would skyrocket to over 200 percent from a positive net cash position, says Lawrence Lau at Beijing-backed brokerage BOCI. Standard & Poor's says a bid would weaken CNOOC's credit profile.

CNOOC could issue new shares to help finance the purchase, but that may not be accepted by Unocal, which would favor Chevron's stock, analysts say.

CNOOC, in which the Chinese government ultimately holds a more than 70 percent stake, could ignore any short-term commercial risks from a bid by declaring the deal a top national interest to secure energy resources.

"This is a good test for CNOOC and also other Chinese companies making overseas acquisitions. Will they give priority to minority shareholders' interest?" asked Gideon Lo, an analyst at DBS Vickers Securities.

What is unknown is whether CNOOC's parent firm would lead the bid for Unocal with an aim to on-sell Unocal's Asian portfolio to CNOOC, while finding a buyer later for unwanted Unocal assets in North America, according to a Merrill Lynch report.

BOCI's Lau and Deutsche Bank say CNOOC may just want to use a hostile bid to cut a better deal with Chevron for a stake in Australia's $8.3 billion Gorgon gas field -- a Chevron-operated project targeting China as a key market.

"The question then becomes whether the Chinese are gaming Chevron into making concessions... CNOOC could gain even further leverage by threatening to go hostile on Unocal," said Deutsche Bank analysts Paul Sankey and Jay Saunders in a June report.

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