The US$18.5 billion bid by China National Offshore Oil Company Limited (CNOOC Ltd), China's No 3 oil producer, for Unocal drew mixed reactions from investors and credit-rating firms yesterday.

Shares of CNOOC inched up by 1.2 per cent to HK$4.20 (53 US cents) in the Hong Kong stock market yesterday, as analysts said the long-awaited offer was better than expected.

But in London, credit-rating firm Moody's placed the company's A2 issuer rating on review yesterday for possible downgrade. Moody's officials said they were concerned about the huge debt CNOOC would incur to finance the merger.

"In addition, the review for downgrade reflects the considerable integration challenges that CNOOC Ltd is expected to face in bedding down such a large acquisition, given its lack of track record in this area," Moody's said in a report.

CNOOC's competitor for Unocal, the ninth-largest oil firm in the United States, is Chevron, the second-largest petroleum company in the United States.

The price of CNOOC shares in Hong Kong tumbled earlier this month when the company announced it would counter Chevron's bid, made in April. Investors had believed that CNOOC's offer price was too high and that Unocal, the same size as CNOOC, is too big to swallow.

Yesterday CNOOC offered US$67 in cash per Unocal share after a marathon board meeting on Wednesday night.

Analysts said the long-awaited offer was better than expected as the proposed cost is "surprisingly" cheap.

The company said it would finance the acquisition with its own cash resources of US$3 billion and with loans from its parent company, China National Offshore Oil Corporation, and investment banks, including Goldman Sachs, JP Morgan, and the Industrial and Commercial Bank of China (ICBC).

The financing cost is cheap because the interest of US$7 billion in loans provided by the parent company could be low, said Liu Gu, an analyst with Guotai Jun'an Securities (Hong Kong) Corp.

The deal, if it goes ahead, would increase CNOOC's revenue by roughly 122 per cent compared with last year, according to the company's telephone press conference yesterday.

Predictions say the merger would more than double CNOOC's oil and gas production and increase its reserves by nearly 80 per cent to 4 billion barrels of oil equivalent.

"Both Unocal and CNOOC are already primary Asia business. Together we will be one of the regional leaders," CNOOC Chief Financial Officer Yang Hua said yesterday at the presentation.

The deal will also help CNOOC to overtake Sinopec as the second-largest oil company of any kind in China after PetroChina.

CNOOC's executives said the merger would help it achieve a more balanced oil and gas portfolio, enabling it to reduce the risk from the fluctuation of crude oil prices.

In return, China's fast-growing liquefied natural gas (LNG) market will allow Unocal to accelerate the exploration and development of gas resources and position it as a long-term supplier to the Bontang LNG plant in Indonesia, the executives said.

"This is a superior and friendly offer to Unocal's shareholders, and we believe they will seriously consider it," CNOOC Chairman Fu Chengyu said.

CNOOC decided not to bid for Unocal at the last minute in March, reportedly because board members were split on whether the proposed bid was in the company's best interests.

But Fu said the company scrapped the proposed bid in March as it needed more evaluation time.

"Now we all believe it is a good project, and we have won unanimous support from the board members," he said.

Meanwhile, Chevron may also raise the terms of its bid to forestall CNOOC's move.

"The US$18.5 billion may just be a start; there will be a second round of wrangling when CNOOC will probably lift its bid to US$20 billion," said a senior official with PetroOverseas who declined to be named.

(China Daily June 24, 2005)