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CNOOC Makes Nexen an Offer It Cannot Refuse

Despite the hefty premium paid, we think that CNOOC is getting a reasonable deal.

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 Nexen (NXY) shareholders have reason to celebrate after  CNOOC, Ltd. (CEO) announced early Monday that it will acquire the firm for CAD 15.1 billion, or CAD 27.50 per common share (debt will remain outstanding). The offer price represents an astounding 61% premium from Friday's close of CAD 17.06 per share. We will be raising our fair value estimate for Nexen to CAD 25 per share, which considers CNOOC's offer price, risked 10% for potential regulatory challenges.

Despite the hefty premium paid, we think that CNOOC, Ltd. is getting a reasonable deal. We estimate the relevant transaction metrics at CAD 18 per barrel of proved reserves, and roughly 5 times our estimate of 2012 earnings before interest, depreciation and amortization, interest, taxes and exploration expense (EBITDAX), which would place Nexen's new valuation in line with the industry. Unfortunately, we think CNOOC, Ltd. could have likely gotten Nexen for a few dollars per share less than what it is paying--we doubt there was much interest for an outright acquisition from other firms.

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Robert Bellinski, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.