* CNOOC has ample cash but may still borrow to preserve
* Healthy market appetite for long-dated Asia corporate
* Citi expected to win key mandate if CNOOC decides to
By Charlie Zhu and Umesh Desai
HONG KONG, July 27 China's CNOOC Ltd,
the world's biggest energy explorer by market value, may borrow
several billion dollars early next year to help fund its planned
$15.1 billion cash bid for Nexen Inc, sources familiar
with the matter said.
Until then, CNOOC is likely to seek short-term financing
from its state parent CNOOC Group or government-run Chinese
banks before replacing it with permanent facilities such as
long-term bonds and loans, they said.
"They may do a combination of loans and bonds once the deal
gets finalised. I don't think anything has been decided yet, but
banks have started pitching," a source familiar with the matter
said on Friday, declining to be identified because he was not
authorised to publicly comment on the issue.
CNOOC launched China's richest foreign takeover bid yet on
Monday, forcing Ottawa to decide whether security concerns
outweigh its desire for foreign investment in its energy
resources. The Chinese oil giant said it plans to finance the
deal with internal cash and external resources.
A doubling of global oil prices since 2005 helped transform
CNOOC into a major independent oil explorer and producer with a
market value of $85 billion. ConocoPhillips is the No.2
E&P company with a market capitalisation of $68 billion,
followed by India's ONGC.
CNOOC had $15 billion cash on hand at the beginning
of this year. Technically, it does not need to borrow to fund
the Nexen deal, bankers and analysts say.
But CNOOC would want to maintain sufficient cash on its
balance sheet to prepare for future acquisitions and the
unlikely event of a sharp drop in oil prices which would derail
its 2012 capital spending plan of $9.3-$11 billion, they say.
"They may opt to borrow some long-term capital and repay
some short-term debt for the purpose of maintaining a sound
liquidity profile," said Kai Hu, senior credit analyst at rating
CNOOC has $3.1 billion of debts becoming due in one year on
its balance sheet as of end-2011, he said.
CNOOC officials were not immediately available to comment.
BONDS AND LOANS
CNOOC and other Chinese state oil firms like Sinopec Group
and CNPC issued bonds earlier this year, raising billions of
dollars and drawing hefty demand as investors such as insurers
piled into rare issues of long-dated quality Asian corporate
CNOOC, with a modest debt-to-equity ratio of 14.5 percent at
the end of 2011, may issue 10-30 year bonds and take up 5-10
year bilateral or syndicated loans, bankers and analysts said,
adding that the chances the Hong Kong-listed company would issue
new shares is low.
Whether CNOOC would move ahead with the fund-raising also
depends on market conditions in the first quarter of 2013, after
the Nexen deal is closed. It may not tap the markets if the euro
zone crisis deepens and borrowing costs surge, bankers say.
In 2005, CNOOC had to rely so heavily on state borrowings
for its failed bid for U.S. explorer Unocal that it generated
strong criticism from U.S. politicians that CNOOC was leveraging
state subsidy to take on a U.S. private company.
CNOOC had planned to finance the $18.5 billion cash offer
with $7 billion of long-term subordinated loans and bridge loans
from its parent, $6 billion bridge loans from the Industrial and
Commercial Bank of China , and a $3 billion
bridge facility by Goldman Sachs and JPMorgan,
which advised CNOOC on the Unocal bid. Only $3 billion would
come from CNOOC's internal cash resources.
For the Nexen bid, with much less state financing, CNOOC
should find it easier to win Canadian regulatory approval,
If CNOOC decides to borrow, banks would be scrambling to win
the coveted financing mandate.
Citigroup, which together with BMO Capital Markets
advised CNOOC on the Nexen deal, would be in a strong position
to win the lead financing mandates, bankers say.
"Citi as an M&A advisor should be the front runner to get
any potential financing mandate," said a source with knowledge
of the matter.
Citi and BMO declined to comment.
It is not known how much advisory fees Citigroup and BMO
would pocket from CNOOC if the deal is completed successfully.
Estimates by bankers not involved in the transaction ranged from
$5 million to $20 million for each bank.