Investors and analysts were left guessing Monday as they weighed the Canadian government's late-night decision Friday to block a takeover of Progress Energy Resources by Malaysia's state-owned Petronas.
They also tried to understand what that decision means for CNOOC's proposed acquisition of Nexen.
For now, Ottawa is remaining tight-lipped about its surprise announcement three minutes before the midnight deadline on October 19 to spike the Petronas-Progress deal, beyond insisting that the transaction is not dead.
Prime Minister Stephen Harper told a brief televised news conference Monday that his government intends "in the not-too-distant future" to issue a new framework clarifying the Investment Canada Act, which covers takeovers by state-owned enterprises. He refused to discuss the reasons behind the government's decision.
Trade Minister Ed Fast told reporters in Vancouver the rejection "does not set a precedent because every single application is considered on its own merits."
Finance Minister Jim Flaherty said Sunday that the government has given Petronas 30 days until November 19 to show it can meet the government's economic benefit threshold to complete the C$5.2 billion ($5.23 billion) deal.
"I'm sure they will continue to work on it," he said on CTV's Question Period program. "There is another period of time during which they can continue to have discussions and try to satisfy the concerns that (Industry Canada) has."
Industry Minister Christian Paradis confined himself to a terse statement that after a "careful and thorough review of the proposed transaction" under the Investment Canada Act he is "not satisfied that the proposed investment is likely to be of net benefit to Canada." He said Canada has a "long-standing reputation for welcoming foreign investment. The government of Canada remains committed to maintaining an open climate for investment."
But Paradis' refusal to say what specific conditions Petronas must meet because of "strict confidentiality reasons" creates doubt over the government's decision, expected November 12, on CNOOC's US$15.1 billion bid for Nexen. That target date could be extended by 30 days at CNOOC's request.
DECISION COULD SPOOK INVESTORS
CIBC World Markets said global investors "have already been struggling with why they need to own Canadian energy and (the Petronas-Progress) announcement clearly does not help -- the last thing investors needed was a reminder that Canada is a risky political environment."
The two companies said Monday they will meet with Industry Canada officials in an attempt to clarify the government decision.
Progress CEO Michael Culbert said in a statement his company will work over the 30-day period "to determine the nature of the issues and the potential remedies." He said the "long-term health of the natural gas industry in Canada and the development of a new LNG export industry are dependent on international investments such as Petronas."
Culbert told Platts last month that Progress would remain an autonomous unit of Petronas and he would remain as CEO, while Petronas' presence in Calgary would be limited.
Raymond James' Calgary-based energy analyst team told clients that "given the decision came just minutes before the (October 19) deadline, we believe Industry Canada effectively killed the deal because it ran out of time to assess the 'net benefit' to Canada."
The analysts said that if the deal is scuttled there a "few" lost benefits, including: the equity premium Petronas offered to Progress shareholders was about 90% or C$2.5 billion, along with a top up after a competing bid emerged; thousands of construction jobs and hundreds of permanent LNG-related jobs; a significant royalty stream from the development of Progress' North Montney shale gas lands in British Columbia; and corporate taxes from liquefaction, pipelining and resource development activities.
"In aggregate, the gross benefits of the Petronas project are well into tens of billions of dollars, which makes it difficult to envision what costs could have been so substantial in Industry Canada's eyes to even approach a notional offset," the analysts said.
MOVE DESIGNED TO MAKE GOVERNMENT 'LOOK TOUGH' AGAINST CNOOC
Credit Suisse said in a note that the Canadian government's "messaging appears confused because of its failure to explain in detail why the deal did not meet foreign investment standards."
"Our view is that the decision is designed to make the Canadian government look tough as they negotiate final concessions from CNOOC over the Nexen acquisition," the firm said.
Credit Suisse said that rejection of two friendly takeovers in the same quarter "would send a clear signal that Canada is not in fact 'open for business,' reducing its attractiveness as an investment destination for Asian capital."
The Canadian industry has estimated it needs C$630 billion in new capital over the next 10 years to develop its oil sands and shale resources by opening up export markets in Asia. Bernstein Research expressed optimism that the CNOOC-Nexen transaction will close, although that will hinge on China's ability to "provide assurances of reciprocity for Canadian companies in China and CNOOC to be flexible over conditions."
The stalling over Petronas and Progress has stirred fresh talk about competing bids for Progress, with sources telling Platts that India's ONGC Videsh Ltd. is planning to make an offer as the lead partner of a group that includes the Gas Authority of India Ltd., Union Oil Corp. and Oil India Ltd.
ExxonMobil, which will become a leading contender to export Canadian LNG if its offer for Celtic Exploration closes and Royal Dutch Shell, the lead partner in the LNG Canada consortium, are both widely viewed as likely bidders for Progress.
Government sources told Platts that Ottawa asked Petronas to agree to wait until December 7 for a decision while a foreign investment policy was finalized. Petronas turned down that request since its current joint-venture with Progress needs the approval of both companies to be extended beyond October 31.
The JV was launched in June 2011 when Petronas agreed to spend C$1.07 billion over five years to gain a 50% stake in three shale gas blocks spread over 150,000 acres in the North Montney play in British Columbia.
The companies are studying the feasibility of building two gas liquefaction trains, each with a capacity of 3.7 million mt/year, an export terminal and a pipeline to deliver 1 Bcf/d of North Montney gas, with LNG exports scheduled to start in 2016.
