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A Progress Energy Resources rig. Trading Monday will be about more than what will happen to Progress and Nexen. Investors are now weighing whether other companies they once saw as easy targets for foreign investors with deep pockets will face similar, although undisclosed, roadblocks. (Progress Energy Resources)
A Progress Energy Resources rig. Trading Monday will be about more than what will happen to Progress and Nexen. Investors are now weighing whether other companies they once saw as easy targets for foreign investors with deep pockets will face similar, although undisclosed, roadblocks. (Progress Energy Resources)

Investors brace for share drop as Ottawa keeps Malaysia's Petronas out of Canada's oil patch Add to ...

It will cost billions to develop Canada’s oil sands and unconventional natural gas fields, and industry supporters argue foreign investment will be necessary to make that happen. Critics, however, worry foreigners, especially state-controlled companies, will soon control too much of the west’s resources unless the government intervenes.

Laura Lau, a fund manager at Toronto’s Brompton Funds, thinks the Progress deal was squashed because of the political hubbub around CNOOC’s chase for Nexen.

“If it wasn’t for Nexen, the deal might have gone through,” she said Saturday. “The questions were always surrounding Nexen. It was never really surrounding Progress.”

The market believed the tie-up between Petronas and Progress would go through because the pair could make a strong case when facing the net benefit test. While Petronas can appeal, Friday’s midnight decision is “not a good sign,” she said. Nexen, Ms. Lau believes, will have an even tougher challenge.

“Part of the reason for Progress is it just can not fund its capital program by itself,” she said. “I think the net benefits in Nexen are not as good as the net benefits in Progress.”

Petronas could bring billions of investment dollars to Canada to develop liquefied natural gas projects, pipelines, and other necessary infrastructure, she said, estimating the price tag for projects could be around $30-billion.

“There was never really a question of net benefit there,” Ms. Lau said. But “Nexen has even less benefits than Progress.”

The majority of Nexen’s projection is outside of Canada, but one of its jewels is the potential to develop its Long Lake oil sands project. This effort has faced serious difficulties, both technically and geologically. Investors hoped CNOOC’s deep pockets could help solve extraction problems by pouring more money into the project than Nexen could on its own.

Ms. Lau, along with others in the market, expects Progress and Nexen’s stock to trade south Monday. Other companies with pending foreign investment deals could do the same, she said.

Investors are already bracing for a market rout Monday, arguing the scotched deal means potential takeovers of other companies are unlikely.

"To say that this is unexpected would be the understatement of the year,” said Eric Nuttall, portfolio manager for the Sprott Energy Fund. He predicted “carnage coming Monday morning,” calculating that companies can expect to see a $10-billion plunge in market value.

“Progress will likely fall by at least 30 per cent,” he said, and suggested Nexen Inc., Encana Corp., Celtic Exploration Ltd. and other companies with exposure to British Columbia’s large Montney gas field could all be affected in the market.

If Ottawa is signalling a broader discomfort with investment from state-owned oil companies, “imagine the potential money that has just been taken off the table,” Mr. Nuttall said. “Staggering.”

Exxon Mobil Corp. on Wednesday offered $2.6-billion for Celtic. – a deal that will also need approval from Investment Canada before it can be consummated. Celtic, like Progress, is a natural gas company. Slews of gas companies are struggling now because of the low natural gas prices and the high cost of developing gas fields. Exxon was rumoured to in the race for Petronas.

Before the Petronas/Progress deal was sent to Ottawa for approval, the Malaysian company had to sweeten its bid for its Canadian target. It offered investors $22 per share in July, up from the $20.45 it offered when the friendly deal was disclosed in late June.

The CNOOC/Nexen deal was expected to be a key test for energy takeovers and potentially force the government to clarify the net benefit rules. However, by blocking the Petronas/Progress arrangement, the government is signaling acquirers must make strong cases in order to gain approval – even when the oil sands are not involved.

Only one of the three takeover deals the federal government squashed involved natural resources. The trio, however, all caught investors by surprise.

Canada’s telecommunications regulator on Thursday nixed BCE Inc.’s proposed takeover of Astral Media Inc. Both firms are Canadian and the Canadian Radio-television and Telecommunications Commission made the decision.

The federal Tories stamped out BHP Billiton Ltd.’s hopes of capturing Potash Corp. of Saskatchewan using the Investment Canada Act in November, 2010. The Anglo-Australian mining company faced sharp opposition from Brad Wall, the leader of the right-leaning Saskatchewan Party and the province’s premier. He lobbied his federal counterparts to block the hostile takeover.

The Conservatives rejected that deal in part because it considered potash a “strategic resource” in the global food supply, Agriculture Minister Gerry Ritz said in the House of Commons at the time. Tony Clement served as Industry Minister when this deal was sidelined. BHP did not appeal the decision.

Jim Prentice rejected Alliant Techsystems Inc.’s plans to buy MacDonald Dettwiler and Associations Ltd. for $1.3-billion in 2008. Alliant is an American company and Mr. Prentice argued the deal would not be a “net benefit” to Canada. This decision stunned investors because Ottawa had never before exercised its power to shoot down deals under the Investment Canada Act.

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