China in hunt for US oil firm

HONG KONG - Chinese state-run oil firm CNOOC has offered to buy United States producer Unocal for US$18.5 billion ($26 billion) in cash, setting the stage for a takeover battle with Chevron.

If CNOOC succeeds, it would be the biggest overseas acquisition by a Chinese firm, reflecting China's broader energy strategy of buying overseas oil and gas reserves to feed its fast-growing economy for years.

CNOOC chairman Fu Chengyu said yesterday that he was confident of winning any takeover battle and maintaining the company's credit rating, despite concerns that a deal would load it down with debt.

Fu said CNOOC's bid was "clearly superior" to Chevron's cash and stock offer to buy Unocal for roughly US$16.4 billion.

"Cash is cash," he said. "One hundred per cent cash offers complete value certainty to Unocal shareholders, as opposed to Chevron's cash/stock offer.

"We are quite confident. We believe the US Government will approve the deal."

Unocal, sought after for its prized Asian assets, said that it would study CNOOC's offer, but that its board continued to recommend a deal with its larger California rival Chevron.

Chevron continued to stand behind its April offer and said its deal was highly likely to close since it was nearing completion of the regulatory process to allow for a vote by Unocal shareholders in early August.

For Chevron, Unocal represents an opportunity to boost its profile closer to industry leaders Exxon and BP, as well as replenish reserves that are getting harder to find.

CNOOC stressed that its bid of US$67 for each Unocal share was friendly and that it was seeking a consensual deal with Unocal.

Chevron's deal to buy Unocal carries a US$500 million break-up fee, meaning any new suitor would have to pay Chevron US$500 million.

CNOOC will finance the deal with cash and loans from banks and stakeholders. It has more than US$3 billion in cash now.

But most company watchers have said a counter-bid would harm CNOOC due to high costs, and investors had already been penalising CNOOC by dumping its shares.

"CNOOC will be drowned by debt," said Eva Chu, head of research at Kim Eng Securities.

The combined company would more than double CNOOC's oil and gas output and increase its reserves by nearly 80 per cent to about four billion barrels of oil equivalent.

Two US congressmen have urged the White House to review any bid by CNOOC, saying it raised concerns about US jobs, energy production and energy security.

US Energy Secretary Sam Bodman said a bid would trigger a "complex" government review.

- REUTERS