Malaysia's state-owned oil and gas company is making a multibillion-dollar bet on Canada's vision to export natural gas to Asia.
Petronas said Thursday it struck a deal to acquire Calgary's Progress Energy Resources Corp. for $5.5-billion. Petronas also chose Prince Rupert, B.C., as home of its planned export terminal for liquefied natural gas.
International energy companies have been spending billions on remote natural gas plays in Alberta and B.C., with plans to sell the gas in Asia where prices are substantially stronger. With a supply glut of gas keeping prices depressed in North America, foreign companies armed with big cash reserves are being welcomed by Canadian energy firms.
"Our asset base requires extensive capital to develop its large potential and ultimately access international LNG markets," Progress chief executive officer Michael Culbert said in a statement. "Petronas offers the size and scale that will enable our company to continue to grow and not be limited by the same cash flow challenges faced by many producers in the North American natural gas market today."
Natural gas in North America sold for less than $2.80 per million British thermal units Thursday. By contrast, LNG is worth as much as $18 per million BTUs in Asia.
This gap has producers in North America searching for partners to help them develop both their resources and export potential. Indeed, Progress, which says it holds the most acres of land in the Montney shale play and controls 1.9 trillion cubic feet of proved plus probable reserves, struck a joint ventrue with Petronas a year ago.
"Petronas is a leader in the LNG technology business, but they don't have the resource," said Norman MacDonald, a fund manager at Toronto's Invesco Trimark Ltd. "If one company brings the capital, the balance sheet, the disciple, and the technology, and the other company brings the real estate, it is a great marriage."
Under the deal, Petronas will pay Progress shareholders $20.45 per share, a 77-per-cent premium to the company's closing price of $11.55 on Wednesday. Including convertible debt, the deal is valued at about $5.5-billion. The Calgary-based company operates in the Deep Basin in northwest Alberta and the Foothills zone in northeast British Columbia.
Building oil pipelines across B.C. and exporting it out of ports on the West Coast has proven tremendously controversial, with some native groups standing in opposition. Discussions around natural gas exports, however, have not been met with the same resistance. David Taylor, president of Taylor Asset Management, expects Canada to support the LNG market.
"If any nation has a vested interested in trying to get $3 gas to Malaysia or Tokyo [where it is worth $15], it is Canada," he said. A slew of companies are now investing in or considering LNG export facilities in Kitimat or Prince Rupert.
Petronas said it will retain Progress' employees. The proposed takeover needs government and shareholder approval, although investors holding roughly 25 per cent of Progress stock have agreed to the deal.
Natural Resources Minister Joe Oliver said there is great interest in rapidly emerging countries to invest in Canadian resource development, due to the size of the resources, the tax and regulatory regime and the open foreign investment climate.
"We don't have enough capital in the country to finance all these projects so we are open to business and welcome investment," he said, noting however that specific deals are subject to an Investment Canada review to ensure they represent a net benefit to Canada.
Ottawa has added additional screening for state-owned companies making major acquisitions in Canada. They must show they are acting in a commercial, rather than political, fashion and are encouraged to establish a Canadian-based subsidiary with local people on its board.
"We certainly welcome companies that are acting like good corporate citizens," he said. "But we're looking at each investment on a case by case basis."
With a file from Bloomberg News