* Talisman, Painted Pony among big gainers
* Lull seen if Nexen deal approved or denied
* TSX energy group up 14 pct since Progress deal announced
By Jeffrey Jones
CALGARY, Alberta, Sept 9 A few Canadian energy
companies have China to thank for pushing up their shares this
summer even as oil and gas prices languished.
Its state-owned enterprises have racked up more than C$25
billion ($25.59 billion) worth of deals in Canada in less than a
decade - the latest being CNOOC Ltd's offer for Nexen
Inc - and some investors are handicapping the next
Gainers include Talisman Energy Inc, Celtic
Exploration Ltd, MEG Energy Corp and Painted
Pony Petroleum Ltd, all with shale gas, oil sands and
other holdings deemed as attractive to Chinese and other Asian
It's a risky game, though, and here's why.
The Nexen deal, the largest so far at $15.1 billion, has
created a conundrum for Prime Minister Stephen Harper's
Conservative government as it begins its review to determine if
the transaction will result in a net benefit to Canada.
Some members of his own cabinet are said to be uncomfortable
with the Chinese scooping up such a large position in the
Alberta oil sands, especially as Canadian companies complain of
being denied access to some of China's resources.
In addition, Harper said last week that his government has
decided to formulate guidelines for the size and types of future
acquisitions it will allow by state-owned enterprises as it vets
the Nexen deal. All of this could take 75 days or more.
That, and some opposition in Washington, has certainly given
investors the willies, and Nexen's shares are holding well below
CNOOC's bid price of $27.50 each. On Friday, they closed at
$25.65 on the New York Stock Exchange.
Gains in other stocks started in late June, weeks before
CNOOC announced the Nexen deal, when Malaysia's Petronas bid for
its partner in a big British Columbia shale gas and LNG
development, Progress Energy Resources.
In that time, Talisman has climbed more than 20 percent,
Celtic 30 percent and Painted Pony 33 percent. The Toronto Stock
Exchange energy subgroup is up just 14 percent since then and is
well down from the 2012 peak it hit in February.
Even a green light from Ottawa for the Nexen deal could lead
to a lull in deals, Macquarie Capital Markets analyst Chris
"It's tough to see anyone coming in and making a corporate
bid for Talisman or Encana with Nexen having just gone out the
door, so I think there's a first-mover advantage here for
Nexen," Feltin said.
"Secondly, if Nexen isn't approved, I think that will shut
the door on any further transactions for our large energy
companies on a corporate basis. So I'm actually not expecting
anything major until the Nexen deal clears and after a
The national energy companies have shown a preference for
companies and assets with distinct characteristics, like acreage
with large reserves of either shale gas, such as the Montney in
northeastern British Columbia, or oil sands in Alberta.
They scope out holdings in which they can deploy their cash
war chests to quickly accelerate development, said Brook Papau,
analyst with ITG Investment Research.
"In general, and there are a few caveats, we've seen that
happen with some more distressed companies," he said. Nexen, for
example, was among the cheapest stocks in its peer group before
the offer due to a record of missed financial targets.
More than once the acquisitors started out as partners in a
domestic company's project before deciding to a bid for the
CNOOC had become familiar with Nexen as a 35 percent owner
of the company's Long Lake oil sands development, and Petronas
got to know Progress through the Montney joint venture before
eventually agreeing to pay C$5.2 billion for the company.
Papau said it is clear that Ottawa did not view the takeover
of Progress as warily as it does that of Nexen, and that deal is
all but done.
Some of that might have to do with size.
A producer with a market capitalization of C$1 billion to
C$5 billion represents a "sweet spot" for potential acquisitions
by Chinese and other state firms, said Martin Pelletier,
portfolio manager at TriVest Wealth Counsel Ltd.
"You're not spending too much; it's very reasonable. And
there's a high probability that it will get approved," he said.
Takeover bids for companies larger than Nexen, such as
Encana Corp and Canadian Natural Resources Ltd
are sure to stoke already-smouldering nationalist fears and are
doubtful to get done, Pelletier said.
For investors, he recommends buying companies with strong
fundamentals rather than for the odds of a takeover by
state-owned enterprises, as so many risk factors come into play.
"That said, it's a great time to be investing in the sector
as a whole because in many cases companies are trading at levels
that transpired in '08 and '09 ... and maybe one or two of them
get taken out," he said. "It's happened with us in our fund, and
we've been able to benefit from it."