Canada Weighs Foreign Direct Investment

Acting while markets were closed, the Canadian federal government blocked the C$5.2-billion bid by Malaysian state oil company Petronas for Progress Energy Resources Corp. under the provisions of the Investment Canada Act, citing that the foreign investment by Petronas was not of “net benefit” to Canada. The rejection came as a surprise to Progress chief executive officer Michael Culbert, who blamed the decision on a “communications breakdown.”

Whatever the rationale for the government’s decision, the rejection negatively impacts other E&P companies’ efforts to secure deals during a time of rising operational costs and low natural gas prices.

Petronas had received the final order of approval for its deal with Progress from the Court of Queen’s Bench of Alberta on August 29, 2012. The acquisition benefited Progress stockholders, who would receive C$20.45 per share, representing an 83% premium over its 30-day volume-weighted average price of C$11.18. The recent federal court decision, however, sent Progress stock down roughly 16% from October 20, when the news was announced, to Friday’s close on October 26.

The two companies are jointly developing the Montney shale play, making Progress a logical target for acquisition by Petronas. Petronas is also experienced in developing liquefied natural gas (LNG) infrastructure, which could help facilitate LNG export from British Columbia to Asian markets—thereby opening up new outlets for North America’s oversupplied natural gas markets.

The federal government’s decision also affected Canadian-based Nexen’s proposed acquisition by Beijing-based CNOOC. Nexen’s stock price took a beating, down 9% over the October 20 to October 26 time period.

Nexen holds acreage in both the liquids-rich Alberta Bakken and dry-gas Horn River shale plays. The Horn River is somewhat similar to the Montney and is close to proposed LNG export facilities.

Unconventional resource development in Canada is steadily growing.

CNOOC’s US$15.1-billion bid represented a 61% premium for Nexen’s stock and was favorably received by Nexen shareholders. It appears that CNOOC had tried to sweeten the deal by ensuring the Canadian government that its stock would be co-listed on the Toronto exchange; Alberta would serve as the company’s international headquarters; and employment and capital expenditures would continue apace.

Another deal under the spotlight, Exxon-Mobil’s acquisition of Celtic Exploration Ltd., Calgary, doesn’t appear to be adversely affected by the Progress ruling. In fact, Celtic’s stock price was largely unchanged by the governments’ ruling. Exxon-Mobil and Celtic have agreed to a C$3.1-billion acquisition in the form of C$24.50 per Celtic share (a 34% premium over Celtic’s 30-day volume weighted average price of C$18.28 a share) plus an additional half of a share in a newly formed company, Spinco.

The acquisition of Celtic provides an excellent opportunity for ExxonMobil to pick up a sizable position (458,880 net acres) in the mostly dry-gas Montney shale play and to add to its position in the Duvernay shale. Further, Montney gas volumes would provide an excellent feedstock for ExxonMobil and Imperial Oil Ltd.’s planned LNG terminal for Western Canada.

All told, these three shale-gas acquisitions could immediately benefit shareholders and bring in $23 billion in foreign direct investment to Canada. More importantly, the deals may accelerate LNG export terminal projects from several points along British Columbia’s coastline. Exports of natural gas, in the form of LNG, from an oversupplied North American market would help lift prices for domestic producers, provide higher tax revenues for provincial and federal authorities, and swell Canada’s foreign currency reserves—benefits worthy of closer scrutiny in the government’s review of Petronas’ amended proposal.

Andrei Sardo, junior analyst, Hart Energy Research, contributed to this article.