October 22, 2012 / 4:40 PM / 6 years ago

Canada's energy shares burned by blocked Progress bid

TORONTO (Reuters) - Leading Canadian energy companies’ shares tumbled on Monday after the government’s shock rejection of a Malaysian takeover bid for Progress Energy Resources Corp (PRQ.TO) raised fresh doubts about Canada’s willingness to accept foreign investment.

Progress Energy skidded 11 percent to C$19.26 on the Toronto Stock Exchange, below Petronas’s initial C$20.45-per-share offer in June, a nearly 80 percent premium at the time. Petronas raised its offer to C$22 in July.

Nexen Inc NXY.TO shares were down about 5.3 percent at C$23.82 on heightened uncertainty over a C$15.1 billion ($15.24 billion) offer for the company by Chinese state-owned CNOOC Ltd (0883.HK), which Ottawa is also scrutinizing.

Canadian Industry Minister Christian Paradis said late Friday night that Petronas’ C$5.17 billion bid for Progress - one of the largest owners of exploration lands in the gas-rich Montney shale region in northeastern British Columbia - would not provide the “net benefit” for the country required by Canada’s foreign investment laws.

“If the Canadian government is going to get involved in making decisions like this everybody needs to know what the set of rules look like,” said Norman MacDonald, a portfolio manager at Invesco Trimark, who sold all of his Progress and Nexen holdings shortly after the takeover announcements.

MacDonald echoed long-held concerns from investors and opposition politicians alike that the Conservative government has not defined the “net benefit” criteria, and said the decision would cause volatility across a lot of oil and gas names.


Prime Minister Stephen Harper, wary of a potential backlash, says Ottawa will unveil guidelines on foreign investment at the same time that it publishes its decision on the Nexen deal.

Canada last blocked a foreign takeover in 2010, when it rejected BHP Billiton’s (BHP.AX) BLT.L $39 billion bid for Potash Corp POT.TO, the world’s largest fertilizer maker.

The rejection of the Progress Energy deal “means government meddling and restriction of free markets. It’s just not positive in general for the markets,” said Levente Mady, vice president and senior portfolio manager PI Financial Corp in Vancouver.

Analysts now warn that the odds of the bid for Nexen being approved have worsened in spite of notable differences between that deal and the Progress Energy one, and that the rejection has negative implications for takeovers in other sectors such as mining.

Menno Hulshof, director of oil and gas institutional equities at TD Securities, said in a note to clients that he believes that the chances of the deal getting the green light have dropped to 25 percent to 35 percent from an implied probability of 77 percent before the rejection on Friday.


Other top decliners on Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE were Encana Corp (ECA.TO), which lost 3.5 percent to C$22.94 and Talisman Energy TLM.TO, down 3 percent to C$12.65.

Mid-tier energy companies, which typically carry a takeover premium, were hit especially hard. Major decliners that space included Birchcliff Energy (BIR.TO), down 4.8 percent to C$8.23 and Advantage Oil and Gas (AAV.TO), off 6.7 percent to C$3.65.

Among other energy names, Penn West Petroleum PWT.TO dropped 3.6 percent to C$13.57 and Arc Resources (ARX.TO) lost 2.7 percent to C$24.24.

Celtic Exploration CLT.TO, the target of a C$2.6 billion takeover bid from Exxon Mobil Corp (XOM.N), was down only 1.4 percent to C$25.84.

Invesco’s MacDonald said he did not expect the Celtic deal to have as much trouble meeting Ottawa’s net benefit test as Exxon has a long history of operating in Canada and, as an investor-owned company, is not subject to concerns surrounding state-controlled enterprises.

($1 = $0.99 Canadian)

With additional reporting by John Tilak in Toronto and Jeffrey Jones in Calgary; Editing by Jeffrey Hodgson and Bob Burgdorfer

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