CNOOC may make $20b cash bid for Unocal

CNOOC may make $20b cash bid for Unocal

Rob Stewart and Matthew Miller, Bloomberg, Hong Kong

CNOOC Ltd., China's largest offshore oil and gas producer, may
bid about US$20 billion in cash for Unocal Corp., the eighth-
biggest U.S. oil company, trumping an offer from Chevron Corp.,
people familiar with the plan said.

The Beijing-based company will offer about $71.50 a share, 10
percent higher than a bid made by San Ramon, California-based
Chevron on April 2, the people said, asking not to be identified.
It would be the world's second-largest cash offer for a company
in at least six years, data compiled by Bloomberg show.

China needs overseas energy assets to help fuel its $1.65
trillion annual economy, the world's fastest-growing major
market. Paying with borrowed funds would cost state-controlled
CNOOC about $1.2 billion in yearly interest payments, the same as
Unocal's net income in 2004.

"It's a relatively high price to pay," said Marc Faber, who
oversees about $300 million as managing director of Hong Kong-
based Marc Faber Ltd. "The Chinese are willing to pay top dollar
for oil reserves and the purchase may not look so stupid in the
long term."
` The company may use some of its $3 billion in cash and borrow
the remainder from banks to finance the bid, the people said.
CNOOC will seek approval for a bid from its eight-member board as
soon as today, they said.

CNOOC's Chief Financial Officer Yang Hua declined to comment
today.

In March, the company's independent directors delayed a vote
on the issue and requested more information to address concerns
an acquisition carried too much risk in terms of strategy and
funding, they said.

Chevron is offering Unocal shareholders a combination of
0.7725 Chevron shares plus $16.25, or 1.03 Chevron shares or $65
in cash. Shares of Chevron last traded at $59.34 in the U.S. The
acquisition would boost its daily output by about 16 percent.

CNOOC needs to move quickly on its bid for El Segundo,
California-based Unocal because the U.S. Securities and Exchange
Commission is poised to approve the disclosure documents on
Chevron's bid. The Federal Trade Commission, the U.S. antitrust
regulator, approved Chevron's takeover plan on June 10.

The Chinese company's bid would have to be approved by U.S.
regulators amid concern about the control of Unocal's energy
assets shifting to China. Two Republican congressmen, Richard
Pombo and Duncan Hunter, on June 17 wrote to U.S. President
George W. Bush seeking a review of any bid by CNOOC for Unocal on
national-security concerns, the Asian Wall Street Journal
reported yesterday.

"This is a politically sensitive issue here," said Michael
Cuggino, who oversees $360 million at Pacific Heights Asset
Management LLC in San Francisco, including Chevron stock. "We're
talking about oil and this a time when there is a shortage of
oil."

CNOOC indicated it would finance the acquisition through bank
debt and available cash, and attached proposal letters from
potential financing sources, according to a May 26 filing made by
Chevron to the U.S. Securities and Exchange Commission.

"Something of that size would be difficult for the company to
digest given its current balance sheet," said John Bailey, an
analyst at Standard & Poor's in Hong Kong. "It depends on exactly
what they do and how they fund it. We're not privy to it at this
stage."

JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG managed
an $850 million sale of bonds convertible into CNOOC shares in
November, the largest such sale by a Chinese company to overseas
investors.

CNOOC is attempting to buy Unocal as crude oil rose to a
record of more than $59 a barrel in New York yesterday. Crude oil
for July delivery rose 90 cents, or 1.5 percent, to $59.37 a
barrel on the New York Mercantile Exchange, the highest closing
price since trading began in 1983. China, Asia's second-biggest
economy, is the world's second-largest user of oil after the U.S.

Goldman Sachs Group Inc. and JPMorgan are advising CNOOC on
the transaction. The New York-based investment banks would share
about $200 million in fees for a successful takeover of Unocal,
the people said.

Goldman spokesman Edward Naylor and JPMorgan spokeswoman Megan
Donald, both based in Hong Kong, declined to comment.

CNOOC's Chairman and Chief Executive Officer Fu Chengyu flew
to El Segundo, California to meet with Unocal executives on Dec.
26 and indicated the Chinese company would make a bid for the
U.S. oil producer, according to Chevron's regulatory filing.