by Aaron Levitt | October 24, 2012 7:00 am
Investing is a fickle mistress.
Markets can stay irrational for long periods of time, panic can ensue — and sometimes the Canadian government can completely change an investment thesis.
Over the last few months, I’ve written about the opportunities in Canada’s Canada’ vast energy wealth. With its huge shale fields, oil sands and conventional natural gas and oil resources, Canada accounts for over 90% of all proven energy reserves outside OPEC.
The nation has undergone a transformation to begin exporting and selling that bounty abroad. Aside from its own exporting plans, that sheer abundance of energy has attracted some big-time attention from foreign state-owned oil giants. Hoping to stake their claim in the nation and grab necessary reserves, the number of blockbuster buyouts, joint ventures and mergers has surged.
So much so, that I recently recommended that investors take a look at adding some of the more likely buyout candidates in “The World’s Energy Supermarket.”
However, it seems like the Canadian government is now switching gears.
While Canada has put out the “Open for Business” sign and has tried to shift its reliance on crude exports away from the U.S., you wouldn’t know that by its recent moves.
Minutes before a critical deadline on Friday, the Canadian government rejected Malaysian state-owned oil firm Petronas’ $5.2 billion bid for gas producer Progress Energy Resources. The move came as a shock to the energy sector because most analysts expected the deal to pass without a hitch.
Petronas — like many other big energy firms — has been seeking to bolster its own shrinking reserves as well as move into less-volatile areas. At the same time, Canada needs about $630 billion worth of investment in its energy sector, especially its oil sands, over the next decade. The deal seemed like a win-win.
The rejection certainly throws a wrench into both plans. Needless to say, shares of Progress (traded on the Toronto exchange) fell more than 9% on the news.
According to Industry Minister Christian Paradis, the proposed investment was not likely to provide any sort of “net benefit” to Canada. Progress has a series of natural gas reserves that would ultimately be shipped to Asia — including Malaysia. Ottawa claims it would be a “conflict of interest” if Petronas were to own the fields and control the pricing of natural gas.
The bid had not been expected to run into hurdles during the review process. However, bowing to public pressure, the Canadian government earlier this month lengthened its review period by two weeks. Ottawa then requested another extension, which Petronas refused, thus forcing the rejection.
This decision throws many other blockbuster deals up in the air. The biggest of which is the $15.1 billion bid from China’s CNOOC (NYSE:CEO) for Canada’s Nexen (NYSE:NXY).
That buyout is the most ambitious venture yet by the commodities-hungry nation into the North American energy sector since its failed 2005 attempt to buy Unocal for $18.5 billion. That deal was thwarted by a U.S. political backlash. Now, it seems that CNOOC-Nexen could be facing similar scrutiny after the Petronas rejection, as does Exxon Mobil’s (NYSE:XOM) $2.91 billion bid for Celtic Exploration.
All in all, the Canadian government seems to be playing hardball with foreign investment within its critical energy sector.
With these deals now in flux, the real question is: Does the investment thesis for Canada’s energy wealth still hold true? To some extent, yes.
Analysts at CIBC World Markets estimate that the Progress-Petronas deal has roughly a 25% chance of being saved and a 50% chance that another multinational oil company swoops in, if Petronas bows out. So, investors hoping for that deal to go through might want to move on.
As for CNOOC-Nexen, that story may have a brighter outcome. First, Progress’s assets are 100% in Canada. By contrast, Nexen is much more diversified and has roughly just 32% of its current production in Canada, and the bulk of that is in the nation’s underinvested oil sands reserves. So, the buyout isn’t just about Canadian crude.
Second, CNOOC has pledged to keep Nexen’s employees on board and make Calgary its new Canadian headquarters, something Petronas never agreed to do. While the CNOOC-Nexen deal isn’t for certain, it still stands a better chance of getting done in some manner. I’m not too concerned … yet.
I’d also willing to bet that Exxon-Celtic deal will go through without a hitch, given the integrated energy giant’s big presence in the Land of the Maple Leafs already.
As for the other potential buyout bait I’ve mentioned — such as Talisman (NYSE:TLM), EnCana (NYSE:ECA) and Husky (PINK:HUSKF) — they’ve only gotten cheaper since the Petronas rejection. At the same time, they still represent quality natural gas and oil reserves and large production profiles.
While an outright purchase may not happen, the possibility of a big joint venture — like Devon (NYSE:DVN) did with Sinopec (NYSE:SNP) — could yet be in the cards. Canada still needs plenty of investment to get its oil sands up and running.
Overall, Canada still represents one of the best places for energy investors to look for beaten-down firms with large reserves. The kinds of deals may vary, but I expect activity there to remain brisk for years to come.
As of this writing, Aaron Levitt doesn’t own any securities mentioned here.
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