CNOOC Limited (HKG:0883) (NYSE:CEO)’s $15.1 billion transaction to acquire Nexen Inc. (NYSE:NXY) (TSE:NXY), Calgary based oil and gas producer is the largest and strategic foreign by the Chinese State Owned Enterprises.
Regulators from the United States are blocking the transaction due to irregularities. Seventy percent of Canadian’s also oppose Chinese companies taking control of Canadian companies.
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According to experts in the oil industry, the chance of getting the transaction approved by Canadian regulators is high but not in the United States. According to analysts, the insider trading accusation does not have a great impact to the transaction.
Tao Jingzhou, managing partner at Dechert LLP Asian Pranctice said, “Insider trades happenand anybody in this process can do it. Lawyers, underwriters, youname it.Insider trades could not have impeded the acquisition unless they evidently affected the bidprice. So I don’t think they will have significant affect on CNOOC’s acquisition.”
The major threat is politics. United States Representative Ed Markey said Nexen of drilling oil in the United States without paying royalties. The company holds a lease issued by Interior Department under the Deep Water Royalty Relief Act that allows oil companies to drill oil without paying royalties.
He urged Treasury Secretary Timothy Geithner to issue a conditional block to the merger until CNOOC Limited (HKG:0883) (NYSE:CEO) agrees to pay royalties on oil produced in the United States or to sell the assets. In a letter to Geithner, Cong. Markey described the merger as a “massive transfer of wealth” extended to China at the expense of American taxpayers. He said, “Giving valuable American resources away to wealthy multi-national corporations is wasteful, but giving valuable American resources away to a foreign government is far worse: It has the potential to directly undermine American economic and national security.”
United States Senator Charles Schumer also voiced the same concern regarding the CNOOC-Nexen deal. On the other hand, Canadian Prime Minister Stephen Harper is cautious regarding the merger.
Last week, the United States Securities and Exchange Commission (SEC) secured a court order from the court to freeze the assets of a firm owned by Hong Kong billionaire Zhang Zhi Rho involved in illegal trading and has business ties with CNOOC Limited (HKG:0883) (NYSE:CEO), the largest crude oil and natural gas producer in China. The firm including other traders gained more than $13 million for selling their Nexen Inc. (NYSE:NXY) (TSE:NXY), shares immediately after CNOOC Limited (HKG:0883) (NYSE:CEO) announced that it will purchase Nexen, a global energy company based in Canada.
The SEC alleged that Well Advantage Limited, a Hong Kong based company and other unknown traders illegally used inside information in connection with CNOOC Ltd. announcement in July 23 that it will acquire Nexen Inc. for $15.1 billion in cash ($27.50 per share). Days prior to the announcement, Well Advantage bought 831,033 Nexen shares through UBS Securities LLC and Citigroup Global Markets Inc. for approximately $14.1 million. The other unknown traders purchased 78, 220 Nexen shares through an account in Singapore with an estimated amount of $1.31 million. The trading became highly suspicious when Wells Advantage and the other traders immediately sold their Nexen shares after the announcement and made millions of profit. SEC also noted the traders had no significant history trading Nexen stocks.
SEC immediately investigated the trading and filed a complaint against Wells Advantage and unknown traders to the federal court in Manhattan in violation of Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.
Based on the complaint filed by SEC, Rho owns another company that has strategic business agreement with CNOOC. Bloomberg identified in its report that Rongsheng Heavy Industries Group Holdings Ltd., a ship builder and petrochemical engineering company is the other company owned by Rho that is closely connected with CNOOC Limited (HKG:0883) (NYSE:CEO) . According to reports, Rongsheng built a deepwater pipe-laying vessel for the Chinese crude oil and natural gas producer in 2007. Rongsheng and CNOOC entered a strategic cooperation agreement in offshore vessel building last year.
In a statement, Sanjay Wadhwa, Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit and Associate Director of the New York Regional Office said, “Well Advantage and these other traders engaged in an all-too-familiar pattern of misusing inside information to place extremely timely trades and profit handsomely from their illegal acts. Despite the challenges of investigating misconduct in the U.S. by trading accounts located overseas, we have moved swiftly to freeze the assets of these suspicious traders and will hold them accountable for their actions.”
According to SEC, the total amount of traders’ assets frozen was approximately $38 million. The court also prohibited the traders from destroying evidences.
In addition, the Commission also asked the court in its complaint to order the traders to give up their profits from the illegal trading with interests, pay financial penalties and to prohibit them permanently from future violations.