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Ontario teachers go all-in on Nexen-Cnooc deal

Plus, an update on one of Alberta's most volatile - and intriguing - investment opportunities

Nov 14, 2012

by Max Fawcett

If you’re looking to find some sort of indication on whether the proposed $15.1 billion Nexen-CNOOC tie-up will go through, look no further than the behaviour of one of this country’s savviest investors. In the most recent quarter, the Ontario Teachers’ Pension Plan tripled its holdings in Nexen, going from 1.72 million shares to 6.82 million. As Sam La Bell, an energy analyst at Toronto’s Veritas Investment Research Corp. told the Financial Post, “You would be holding Nexen right now on the belief that the deal is going through.” Given that there’s an approximately $3 spread between Nexen’s current share price and the $27.50 per-share offer tabled by CNOOC (never mind the possibility that it may raise that offer as part of its effort to convince the federal government of the “net benefit” of the deal) there’s an interesting arbitrage opportunity here for investors.

And if you think exposing yourself to a potential a 35 per cent loss (the spread between Nexen’s current share price and where it was trading pre-offer) in order to capture a 10 per cent gain is risky, don’t even think about investing in Niko Resources. The company’s wildly volatile shares have taken another stomach churning turn to the downside, piercing the $10 level after news of a series of unsuccessful exploration wells and the looming $220 million convertible debenture that may force the company to issue equity at highly dilutive prices. It insists that it’s looking to find an alternative method of financing, whether that involves high-yield debt or the sale of some of its assets, but the share price suggests investors aren’t convinced.

Still, if you’re an optimist – maybe you subscribe to the “darkest-before-the-dawn” theory of investing – there’s a lot to like with Niko. As FirstEnergy wrote in a recent update on the company’s shares, “We note that there is very material upside potential to our risked NAV estimate should a non-equity financing solution be achieved. Our risked NAV estimate is $30.43 per basic share [$18.48 per diluted share].” That estimate also ascribes very little value to the company’s speculative properties. “Within our risked NAV estimate,” analyst Darren Engels wrote, “we only ascribe value to one block out of 22 blocks in Indonesia and three blocks out of 8 blocks in Trinidad. There is a significant component of the exploration portfolio that we currently do not value. If the company is able to monetize any of these blocks currently not valued (i.e. cash from farm-out arrangements or asset sales), there is potentially considerable value to still be extracted from Niko.”

That’s the thing about hunting elephants, which is effectively the business that Niko’s in. All it takes is one kill.

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