China's Oil Producer Mulling Unocal Bid Vs. Chevron

Chinese offshore oil producer CNOOC Ltd. (search) said on Tuesday it was still weighing a bid for Unocal, possibly spoiling oil major Chevron's deal to buy the U.S. producer for $16 billion.

Chevron (CVX) won a race against several oil firms, including state-run CNOOC, with an April agreement to buy smaller Californian rival Unocal (UCL) in a cash and stock deal. The transaction is pending regulatory approval and carries a $500 million break-up fee, meaning that any new acquirer would have to pay Chevron $500 million.

CNOOC said in a statement to the Hong Kong Stock Exchange (search) that it was "continuing to examine its options with respect to Unocal. These options include a possible offer by the company for Unocal, but no decision has been made in this respect."

"No assurances can be made that the company will ultimately make an offer for Unocal," it added.

It was the first time CNOOC made public its intention to buy Unocal since Reuters reported in January that it was considering a large overseas buy, possibly Unocal. The announcement was in response to a Bloomberg report on Monday that "CNOOC is not considering an offer for Unocal," CNOOC said.

Sources close to the Chinese oil firm and analysts have said CNOOC was unlikely to trump Chevron's offer because of the $500 million break-up fee.

A person close to CNOOC told Reuters on Tuesday that the Chinese company was monitoring the situation and had hired investment bank Rothschild for independent review on Unocal, but it remained highly unlikely for CNOOC to make a counter-bid.

"It is still ... very hard for CNOOC or any non-American company to take on Chevron in its own backyard," the source said. "The probabilities are still stacked against CNOOC."

CNOOC cancelled its offer for Unocal earlier this year because the original plan, backed by Chairman Fu Chengyu, had failed to win the support of the Chinese firm's board.

CNOOC is interested in acquiring Unocal because its oil and natural gas assets in Asia fits CNOOC's aspiration to become a major regional liquefied natural gas (LNG) player. It would have to sell Unocal's unwanted U.S. assets.

A takeover by CNOOC of Unocal would create an entity with a combined market capitalisation of nearly $39 billion, based on Monday's closing stock prices.

The Chevron deal was originally worth $16.4 billion, but Chevron's stock price weakness has reduced the value to about $15.9 billion. Chevron would also take over $1.6 billion in debt. CNOOC had net proven reserves of 2.2 billion barrels of oil equivalents (BOE) at the end of last year, compared with Unocal's 1.754 billion. The Chinese company produced 382,513 barrels of oil and gas per day in 2004, compared with Unocal's 428,000 barrels per day in the fourth quarter of 2004.

Sources say that if CNOOC were to buy Unocal, it would have to finance it with a combination of cash, debt and stock, stretching its balance sheet.

CNOOC shares were down 0.58 percent at HK$4.275 at 0746 GMT. The stock has risen 3.6 percent so far this year, outperforming a 2.8 percent drop on the main Hang Seng Index (search) but underperforming a 25 percent jump in PetroChina shares

"The announcement has minimal impact on the stock performance. It's not telling you anything except they are interested in Unocal," said Mona Chung, portfolio manager at Daiwa Asset Management (H.K.) Ltd. "There's no concrete information such as valuations and all the pricings."