Market Overview

Nexen: One and Done

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The Canadian government's decision to approve China's government-owned energy company, Cnooc's (NYSE: CEO) takeover of Nexen (NYSE: NXY) puts an end to vague policies regarding the acquisition of Canada's strategic assets by foreign governments.

Canadian Prime Minister Stephen Harper approved both the Cnooc takeover of Nexen and the takeover of Progress Energy Resources by Petronas, Malaysia's government-owned energy company. At the same time, Harper said, ““When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,” Bloomberg reported.

Harper announced new guidelines for investment in Canadian companies by foreign governments. Under the guidelines, companies owned by foreign governments would be restricted to minority stakes or joint venture roles, rather than outright takeovers. “Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada,” Prime Minister Stephen Harper said in a statement reported by The Wall Street Journal.

It is widely thought that the restrictions on investment in oil sands will not apply to natural gas. Canada has been increasing its production of natural gas but demand for Canadian gas in the U.S., Canada's largest export market, has been declining due to increased production of shale gas and declining prices.

With gas production effectively “bottled up” north of the border, Canada has decided to look for new export markets for its surplus gas. Plans are now being made to build a major liquid natural gas (LNG) export terminal in British Columbia to service the Asian market, where gas demand is growing and prices are strong.

The construction of an LNG export terminal will cost between $9 billion and $11 billion, according to some sources.

With the approval of the Canadian government, Nexen shares rallied nearly 14 percent to just under Cnooc's bid price of $27.00.

Speculation may now turn to Canadian natural gas producers, particularly those in western Canada near the proposed LNG export terminal in British Columbia.

In the meantime, China, which is now effectively shut out from acquiring more Canadian oil sands companies, will have to look elsewhere for its future investments. China has been making a big effort to acquire all types of resources throughout Africa and Latin America, where Chinese investment is openly welcomed with political strings attached.

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