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| China's move to buy Unocal expensive but strategic (China-U.S.) |
| | Poster: AFP | Posting Date: 2005-07-07 | |
An attempt by China National Offshore Oil Corporation (CNOOC) to buy US oil major Unocal is an expensive but strategic move that makes plenty of sense for China, analysts said. "It is basically as if China was buying Unocal," said Shang Ma, an analyst at Fitch Ratings, commenting on the 18.5-billion-dollar bid. "This is more a political bid than a commercial bid." China has repeatedly said it wants energy security for its voracious economy, which is likely to have grown by 9.5 percent in the first half of this year from the same period last year. Most analysts agree that the deal is risky, and that it makes far more sense from the perspective of the Chinese government than from the viewpoint of a publicly listed company such as CNOOC. "The Chinese government thinks it's a reasonable price for the long term," said Gideon Lo with DBS Vickers. "They don't mind paying a premium." China's imports of crude rose 34.8 percent in 2004 to 122.7 million metric tonnes, making it the second largest importer in the world after the United States. It is estimated the country will need 450 million tons of crude oil and 200 billion cubic meters of natural gas a year by 2020, with imports of oil accounting for 50 percent of China's needs by the end of the decade. After years of debate, China has recently signaled it will move ahead with a strategic oil reserve, though it is nervous about stocking the reserve with prices near 60 dollars a barrel. And China has been hinting broadly that it would like to put its massive 691 billion dollars in foreign exchange reserves to better use. Most of that is now parked in low-yielding US treasury bills. Since some economists have suggested that China use a portion of its reserves to make direct purchases of oil, a purchase of a major producer of oil has a certain logic, analysts said. While the Chinese government controls CNOOC, owning 70 percent of the shares, it has the interests of minority shareholders to consider, analysts noted. For CNOOC shareholders there clearly would be some benefits if the company manages to persuade Unocal to walk away from a 16.4 billion dollar offer of cash and stock from Chevron, analysts said. Chevron's offer is lower but it has already gained regulatory clearance, a key attraction in the politically-charged atmosphere as US congressmen line up in opposition to the CNOOC deal. And Chevron has the support of the Unocal board. But if CNOOC's bid is successful, the Chinese company will gain access to Unocal's Asian and Caspian oil and gas reserves, propelling it to the frontline of the Asian energy market. It would more than double CNOOC's oil and natural gas output and boost its proven reserves by 80 percent to four billion barrels of oil equivalent. But some analysts insist CNOOC's all-cash bid may be too expensive and will be financially sustainable only if oil prices remain at their current record highs and if Unocal's Asian assets reveal more oil and gas reserves. "I think the offer is expensive," said May Yu, oil analyst for BNP Paribas, said. International credit agencies have warned the bid, if it goes through, will saddle CNOOC with debt that would cost some 800 million dollars in interest annually. Fitch Ratings said it placed CNOOC Ltd's "BBB+" senior unsecured foreign currency rating on negative watch. "The deal increases the risk profile on the company as it needs to absorb some 16 billion dollars of debt, of which some 5.6 billion dollars relies on successful issuance of debt and equity," Mario Traviati, a Merrill Lynch analyst, said in a note to clients.
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