china, neighbouring guyana., page-19

re: cnooc bid for hdr? Hardmano says:

Interesting theory Ching. But why wouldn't CNOOC be more interested in other second tier oil companies around the world more of the size of say STO? We all think Mauritania is the centre of the oil universe .. but it may not necessarily be seen as such by the Chinese. Any other reasons you think they may want in?


My answer:

Suppose you are the CEO of CNOOC. You've been told by your largest shareholder, the Chinese govt, to build reserves. The larger oil companies can't be acquired due to political interference so you turn to smaller targets. HDR is one of hundreds. Why might it be near the top of CNOOCs list?

1. Valuation. CNOOC want to get a good return on their investment. HDR is at or below most broker valuations and these valuations typically give no value to Guyana and other sites, and they assume an unrealistic long term oil price of around $US35 per barrel. At current prices HDR is an attractive target.

2. Early life cycle assets. No point in going through the takeover trauma for an oil company with mature production assets and dwindling reserves. With HDR all the assets are early in the life cycle so should provide a longer term boost to CNOOCs reserves.

3. Relative CNOOC advantage in Muslim countries. US/Oz/UK have damaged their reputations in the muslim world by their misguided decision to attack and occupy an oil rich Islamic country for dishonest reasons. China has a clean reputation and will have an advantage operating in muslim countries. Therefore they would have a relative advantage as an operator in Mauritania.

4. Relative CNOOC advantage in dictatorships. The major oil companies face problems in their home constituencies when operating in countries with poor human rights records, like Mauritania. China has no such qualms and has a relative advantage working in dictatorships.

5. Relative power of CNOOC compared to partners. CNOOC has excellent leverage with Woodside due to the importance of China as a customer of the NW shelf. If it was CNOOC instead of HDR as the partner in Mauritania I doubt if woodside would try shortchanging HDR, as happened recently triggering legal action.

For these reaons I think HDR would be more attractive than most other small oil companies to CNOOC. Our 2006 annual report could be in Mandarin.