Tuesday 23 October 2012

Petronas Rejection Casts Doubt on Cnooc $15.1 Billion Bid



Canada’s rejection of a bid by Malaysia’s state oil company for Progress Energy Resources Corp. (PRQ) casts doubt on Beijing-based Cnooc Ltd.’s $15.1-billion takeover of Nexen Inc. (NXY) and raises questions about the openness of Prime Minister Stephen Harper’s government to foreign investment.

Industry Minister Christian Paradis said in a statement he wasn’t satisfied the C$5.2 billion ($5.23 billion) acquisition by Petroliam Nasional Bhd., known as Petronas, is in Canada’s interest. Harper’s Conservative government reviewed the bid under its foreign takeover law, which says transactions must be judged to have a “net benefit” to Canada.

“The implication now is that the government does not want a foreign national oil company to acquire Canadian companies,” said Eric Nuttall, a portfolio manager with Sprott Asset Management LP in Toronto. “For a Conservative government to make this decision is mind-boggling. The amount of capital that that decision wipes out is stunning.”

The Petronas rejection marks the second time in two years Harper’s administration has denied a multi-billion dollar overseas bid. The government blocked BHP Billiton Ltd. (BHP)’s $40 billion hostile offer for Potash Corp. (POT) of Saskatchewan Inc. in 2010 after the province’s premier, Brad Wall, opposed it.

Canadian Finance Minister Jim Flaherty said Petronas still has the opportunity to negotiate with government officials to salvage its rejected bid for Progress.

“The proposals have to be correct, and certain conditions from time to time will be proposed by the minister of industry and it’s his responsibility, and I think that’s what’s going on in this particular application.” Flaherty told CTV.

Undermines Message
The ruling undermines Harper’s message that Canada welcomes foreign investment, investors said. Harper has called it a “national priority” to sell more natural resources to Asia, to boost growth in the world’s 11th-largest economy by diversifying exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s shipments abroad.

Canada’s gross domestic product of $1.74 trillion exceeds Malaysia’s annual output of $279 billion, according to data compiled by Bloomberg.

Selloff Coming
Current projects in Canada’s oil-sands, part of the third- largest oil deposits in the world, require investments of C$220 billion, the Canadian Energy Research Institute said in a March report.

Canada needs an “immense” amount of capital to develop its oil and gas, Natural Resources Minister Joe Oliver said on Sept. 4. “We don’t have enough capital in this country so we are welcoming capital from outside,” he said after a speech in Toronto.

The Petronas decision will probably prompt a selloff in shares of Progress and Nexen, as well as companies such as Encana Corp. (ECA) and Talisman Energy Inc. (TLM) that have been perceived as takeover targets, said Sachin Shah, a merger arbitrage strategist at Tullett Prebon Americas Corp. in New York.

“This is going to put a pall on basically the whole energy sector, and maybe even materials -- gold, copper, silver,” Shah said in a telephone interview. “If he wants to look for net benefit, watch what happens Monday. Billions of dollars are going to be lost.”

Outpacing Index
Progress shares closed at C$21.65 on Oct. 19 in Toronto, down 0.9 percent and below the C$22 a share offer from Petronas. The company’s stock is up 64 percent this year, while the S&P/TSX Energy Sector index is little changed over that period. Nexen shares dropped 1.5 percent to $25.40 in New York, 7.6 percent less than the $27.50 offered by Cnooc. It was the biggest drop in three months for Nexen, paring the year-to-date gain to 55 percent.

Investors should buy Progress shares if they fall as far as C$17, said Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, in an e-mailed report.

Patti Lewis, a spokeswoman for Nexen, and Peter Hunt, a spokesman for Cnooc, did not immediately return e-mails seeking comment.

Petronas has 30 days to appeal or provide additional concessions, at which point the government will make a final decision, according to the statement by Paradis. The company can be given more time if both parties agree.

Surprise Decision
“We’re very surprised by the decision,” Progress Chief Executive Officer Michael Culbert said by phone from Calgary after the decision was released minutes before the midnight review deadline on Oct. 19.

Petronas will appeal the ruling and Progress will “help where we can help,” Culbert said. “We believe that the transaction is of net benefit to Canada. Progress will continue to work with the federal government to prove that point.”

Still, some investors say it’s hard to decipher the government’s intentions without any explanation for the rejection. Investment Canada Act rules prevent Paradis from commenting, aside from saying the deal didn’t provide a net benefit.