Petronas bid points to hunger for Canadian energy assets

Share

Investors disappointed by Ottawa's annulment of Petronas's takeover of Progress Energy Resources Corp. should take heart. The Malaysian company's bid was a clear indication that many Canadian energy companies are massively undervalued at current prices.

The $22 a share that Petronas was bidding for Progress – double where the stock had been trading previously – was not pulled out of thin air but the result of careful analysis. Petronas management was confident enough in the ability of Progress's assets to generate long term cash flow that it was prepared to risk $6-billion on the acquisition.

The difference between the stock market's valuation of Progress, which was trading around $11 a share ahead of the offer, and the bid price likely comes down to the time frame used by the different parties involved. Equity investors have become increasingly focused on the short term and were concerned about investment risks that could occur in the next few quarters. Petronas, as a potential owner of the company, was free to ignore those short-term risks and calculate the long-term value of the assets.

Those who own Progress Energy stock will no doubt endure a difficult market session Monday, as the stock is sure to plummet. But they should be encouraged by the realization that, if Petronas's expert analysis of the company is correct, they need only wait for the underlying value to be realized. The establishment of an LNG export facility in British Columbia, combined with rising natural gas demand in Asia, would see the stock eventually exceed $22 even without the help of a foreign takeout bid.

Other investors should also take note. The large premium in the bid for Progress, and also in CNOOC's bid for Nexen, is a sign that the long-term value of Canadian energy assets is intact. The flurry of takeover bids is a wake up call: Investors who are willing to stomach some short-term volatility will be amply rewarded for their patience.