Nexen Inc. 7.35% Sub Notes 2043 NXY.P.B

live show FROM Paul Murphy

[Bigpaulbunyon]

 and Neil Hume on the FT live market commentary                                                                                                                                                                                                                   anything more on yesterday’s Nexen story

NH

still working on it

Connecting to markets live...

NH

the stock closed off its highs

Markets live is streaming...

NH

prolly down to the fact that Total was/is trying to play everything down

NH

saying things like this is really preliminary

NH

not in a position to bid etc?

NH

which surprised me

PM

yes -- telling analysts that there was nothing in the story that Total considering a bid for Nexen of Canada

NH

again very surprising

PM

So we will hopefuly have a bit more on that later -- maybe a full scale retraction or maybe not.

NH

anyway, the reaction from analysts is that a deal makes sense and it could trigger a wave of consolidation in the sector

NH

and also

NH

Total CDS spiked higher yesterday – widened by 46% to 150bps

PM

Hmmm - some move

NH

picked this comment up from Collins Stewart this morning

NH

Possible offer for Nexen
In the overnight press, several sources including Bloomberg reported that Total is preparing an offer to buy Canada’s Nexen. While we cannot comment on the accuracy of the reports or the likelihood of such a deal, given its potential magnitude we discuss some of the key issues below. Note that Nexen commented last night that it was unaware of any corporate developments, while there was no comment from Total.

NH

Deal details?
If the press reports prove to be correct, Total is to offer C$38/share for Nexen, a 73% premium over the 1 December close and not far below the $40-42 share peaks seen in June. The total consideration would be C$19.8bn, or US$15.8bn (Eur12.5bn).

Based on Nexen’s end-07 proved reserves after royalties, including its stake in Canada’s Syncrude project, this would be equivalent to around US$21/barrel of oil equivalent.

NH

However, this is based on proved reserves alone and given the large potential upside of Nexen’s resource base, the cost on wider definitions of resource would probably be considerably lower.

Funding possibilities
Based on end-3Q08 figures and including Nexen’s latest debt, such an offer – if it were all cash - would take Total's net debt-to-equity ratio up to around 34% on our estimates, which would be above average for the supermajors but by no means excessive for the sector.

NH

Press reports point to Total already having Eur7.5bn – or 60% of the speculated purchase price – of agreed funding in place already. If this were the case, we would expect that the rest could be part-funded by an accelerated sale of the remainder of Total’s Eur7bn stake in Sanofi-Aventis.

Total – a solid core holding
In our view Total represents a good, low risk core holding in the oil sector, although we see better share price upside in Royal Dutch Shell

PM

Okay -- so that's a collins stewart person who doesnt read AV

PM

We said "up to" 38 dollars

PM

and also that a sale of the Sanofi stake was considered

PM

but will not be pursued

NH

also picked this up from Cazenove

NH

E&P sector - who goes next?

NH

It may be occurring slightly later than expected, but consolidation in the E&P sector is gathering pace, as predators exploit the substantial gap between share prices and underlying fundamental value.

In our view, the conditions to induce further consolidation in the E&P space exist;

The oil price has fallen sharply - this reduces the market's assessment of fair value, and typically narrows the value expectations gap between target and predator.

NH

Predators remain financially strong – large-cap oil has deleveraged into oil price strength; dollar strength only amplifies their purchasing power of UK shares.

Financing for independents is problematic - equity markets are shut and debt markets are only open selectively on much tougher terms. Some independents face the stark choice between a compromised growth strategy or a corporate sale.

Valuations have collapsed - we measure an average discount to core NAV of 31% and EV per commercial boe multiple of just $4.5.

NH

Technical ownership risks of some stocks are also not yet resolved - hedge fund redemption and deleveraging remains an issue that predators may look to exploit.

We have assessed company-specific takeover risk and nominate Heritage Oil and Dana Petroleum as two very different companies that look especially vulnerable to an opportunistic takeover approach. We sense that investors may have sold out of this sector given its oil price sensitivity and may now be in danger of missing some high impact M&A action - we therefore stay OVERWEIGHT

NH