Purchasing Repsol YPF Indonesian oil fields was the best thing CNOOC could have done for its shareholders, says Mark Qiu, CFO and senior vice president of China's offshore oil and gas company, CNOOC. The US$585 million acquisition, which came into effect on New Year's Day, was paid for entirely in cash. Qiu explains that this was "an opportunity to rid the company of some spare change". Meanwhile the oil fields were already in production giving the company instant returns without significant investment.
The largest acquisition by a listed Chinese company, and the first international acquisition by one of China's three public oil and gas companies, the deal has nevertheless been panned for not adding significant value to the company. Qiu waves this aside. He is confident the market agrees with management's assessment of the deal, and notes that CNOOC's share price went from US$7.50 the day before the announcement to US$8.15 the following week. "You pay for what you get," says Qiu. "I'm not paying for a billion dollar deal." He points out that the US$585 million base price provides the company with 6-7% earnings growth potential. Says Qiu: "Is 6% to 7% growth material? Of course it is!"
Repsol YPF first looked to sell its non-core assets in Indonesia back in 1999, when Repsol acquired YPF and thereby took on considerable debt. Although CNOOC was initially approached in 2000, the company was too busy preparing for its IPO to consider the deal. However, when a potential sale of the business in 2001 fell through (believed to be as a result of disagreement over Repsol's high valuation), CNOOC was approached again. This time it was interested. With Merrill Lynch as advisor the parties soon had a deal.
Priced at US$1.63 per barrel of energy the purchase compares favourably to other such transactions in Indonesia, says Mun Hoong Wong, director at Merrill Lynch. In a similar deal – the Thai energy company PTT Exploration & Petroleum's acquisition of a stake in Indonesia's PT Medco Energi in November last year – valuation was agreed at US$1.74 per barrel of oil equivalent. Structured as an acquisition of an indirect non-controlling interest in Medco, this deal will furthermore allow CNOOC to have direct interest in the underlying assets with access to cash flow.
But the events of September 11 took their toll on oil prices, which became extremely volatile. Not surprisingly, CNOOC was prepared to pursue a low oil price, while Repsol argued for a significantly higher valuation. Wong explains that the inherent volatility of oil prices made it necessary to devise a price adjustment mechanism to bridge the valuation gap between the two parties. This mechanism gives a valuation based on oil prices on an agreed future date after signing. For example, based on the oil prices on the day prior to announcing the deal, the mechanism would have reduced the ultimate cost of CNOOC's purchase by US$3 million.
Although Merrill is unable to reveal when the mechanism will come into effect, Wong confirms that it will be some time in the near future, involving a combination of spot and forward prices of crude oil. To protect both parties, the mechanism has a US$30 million band in place.