Petronas rejection may hurt Canadian stocks

CALGARY/TORONTO Sun Oct 21, 2012 7:10pm EDT

Motorists pump natural gas at a Petronas station in Kuala Lumpur July 1, 2010. REUTERS/Bazuki Muhammad

Motorists pump natural gas at a Petronas station in Kuala Lumpur July 1, 2010.

Credit: Reuters/Bazuki Muhammad

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CALGARY/TORONTO (Reuters) - Canadian markets could face a bloody opening on Monday after the government blocked the C$5.17 billion ($5.22 billion) acquisition of Progress Energy Resources Corp PRQ.TO by Malaysian state oil company Petronas PETR.UL, raising questions about other, bigger bids and about Canada's willingness to let foreign investors in.

Canadian Industry Minister Christian Paradis said late Friday night that Petronas' bid for Progress -- one of the largest owners of exploration lands in the gas-rich Montney shale region in northeastern British Columbia -- would not provide the "net benefit" for the country required by Canada's foreign investment laws.

Investors had expected a favorable decision on the bid by the minister, especially given Petronas' pledge to help spur Canada's nascent liquefied natural gas export industry by building an LNG export facility on the country's Pacific coast.

But Paradis' veto also raises doubts over the outcome of Chinese oil group CNOOC's (0883.HK) C$15.1 billion offer for oil producer Nexen NXY.TO and is expected to weigh on other Canadian firms hoping to tap the foreign investment needed to harvest their vast energy reserves and the mood among investors is somber.

"We're going to see sell-offs all around and gore on the floor for Progress and Nexen," said Chris Damas, an independent analyst with BCMI Research.

Still, the ruling Conservatives say the refusal is not an issue. Petronas and Progress have 30 days from last Friday to convince the Canadian government to reconsider the decision. Canadian Finance Minister Jim Flaherty confirmed on Sunday that the government is willing to negotiate.

"I'm not involved in those discussions directly. The minister of industry is," Flaherty said in an interview on CTV's "Question Period". "I'm sure they'll continue to work on it. There's another period of time during which they can continue to have discussions and try to satisfy the concerns that the Department of Industry has."

Along with Progress and Nexen, some analysts think that mid-sized energy companies operating, like Progress, in the Montney shale-gas region of northeastern British Columbia are most likely to be hit by selling pressure when the Toronto Stock Exchange opens on Monday.

"The intermediate (oil exploration and production) group is significantly impacted by the Progress/Petronas decision, reflective of a high weighting to gas-focused Montney producers," Greg Pardy, an analyst with RBC Capital Markets, said in a research note.

"We expect the group to be under considerable pressure during Monday's trading session and believe that as of Friday's close, about 15 to 20 percent of a (merger and acquisition) premium is currently 'baked in' to the Montney stocks."

Even if Canada reconsiders its decision, the damage to the country's reputation as politically stable place to invest may be fixed less easily.

The deal is the second major foreign takeover blocked by Prime Minister Stephen Harper's government in as many years, following the 2010 rejection BHP Billiton's (BHP.AX) (BLT.L) $39 billion bid for Potash Corp (POT.TO), the world's largest fertilizer maker.

Now investors are trying to figure out how much political risk has to be factored into potential Canadian investments.

Along with the Petronas and Potash decisions, the market has also been unsettled by the decision on Thursday by Canada's broadcast regulator to block BCE's (BCE.TO) C$3 billion bid for Astral Media ACMa.TO because the deal would give too much power to BCE, Canada's biggest telecoms company and the owner of numerous TV and radio assets.

As well, opposition from the Quebec government last month convinced Lowe's Cos Inc (LOW.N) to walk away from a C$1.8 billion unsolicited for Rona Inc (RON.TO), a Canadian home-improvement retailer.

"The one thing that I take away from all of this is that as modern as Canada is and as westernized as it is, as democratic as it is, the political environment is very much the wild west in terms of what the rules are," said one trader, who owns shares of Nexen and Progress but who asked to not be named.

"It's in some ways equivalent to investing in China or investing in Africa or investing in South America, where governments can do whatever they want."

Canada's tar sands are the world's third-largest crude oil reserve, behind only Saudi Arabia and Venezuela, while the country's vast shale oil and gas deposits are still in the early stages of development.

The government has said the oil sands alone will require C$650 billion in investment over the next decade, much of which will have to come from foreign sources.

However, the government yet to make good on the pledge to clarify what constituted a net benefit under the Investment Canada Act made when it turned down BHP's Potash bid. Observers are saying that after the Petronas decision, the Conservatives must offer clear guidelines on the rules for overseas investors.

"The next message they have to send out is that 'We are still open for business, but here are the terms in which we are open for business. We'd love to work with you and take on foreign capital' and we haven't seen that yet," said Martin Pelletier, a portfolio manager with Trivest Wealth Counsel. "Hopefully we'll get some clarity on that in the next month or so with the Nexen-CNOOC deal."

($1 = $0.99 Canadian)

(Additional reporting by Jeffrey Jones in Calgary and David Ljunggren and Randall Palmer in Ottawa; Editing by Maureen Bavdek and Marguerita Choy)

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Comments (6)
jo5319 wrote:
Sounds like they just want a better deal, and more guarantees.
If Merkel were leading Malysia, she would have accused Canada of protectionism instead of working on a better deal, given how she bullied her way around world economies in Europe as well as in Asia, purely by virtue of the economic strength of Germany.

Oct 21, 2012 6:48pm EDT  --  Report as abuse
GeorgeBrown wrote:
A nation’s government should protect the interests of that nation. Ottawa should do what is best for the country and let the chips and the stocks fall where they may. I’m getting very tired of seeing large foreign companies get a foot in the door of my nation and its resources. The idea of CNOOC and other Chinese companies worries me most of all. How much pull would these foreign companies have? Would they be able to cut corners and evade environmental regulations? What about labour standards? Where will the profits end up, here in Canada or in China or Malaysia? We have laws for foreign investment and these laws are especially important in the resource sector.

Oct 21, 2012 8:00pm EDT  --  Report as abuse
usurier wrote:
It will hurt Canadian stocks. And more important, it will negatively impact the perception the world has of doing business in Canada. You can forget about Canada becoming an energy super power. As stated in other articles, there’s not enough capital in Canada to develop the oil & gas resources.
The only winners are the US and European oil & gas companies. A lot of bidding competition has been removed for them. Canadian companies are a lot cheaper now.
And thinking that blocking this transaction protects the Canadian interest is nonsense. Even if the owner is Petronas, the oil is in Canada. Royalties will be paid, etc.

Oct 21, 2012 8:05pm EDT  --  Report as abuse
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