Late Friday evening, the Minister of Industry, Christian Paradis, rejected the proposed transaction between PETRONAS and Progress Energy, Inc. (NYSE:PGN). No details were provided on the reason why the deal was blocked, or what would be required to satisfy the “Net Benefit” test. The ‘Net Benefit’ test is used by the Canadian Government to determine whether to allow a merger to proceed.
However, a news article over the weekend suggested that the government wanted an extension, and that PETRONAS refused and demanded a decision from the government. Analysts at National Bank Financial were unable to verify these facts; however, it does appear the government is still open to the deal, assuming more conditions are met.
In his first-quarter letter to investors of Greenlight Capital, David Einhorn lashed out at regulators. He claimed that the market is "fractured and possibly in the process of breaking completely." Q1 2021 hedge fund letters, conferences and more Einhorn claimed that many market participants and policymakers have effectively succeeded in "defunding the regulators." He pointed Read More
What happens now:
PETRONAS now has 30 days to respond, and that timeline can be extended by the Minister or the investor, after which, Christian Paradis will make a decision to reject or approve the acquisition. Progress Energy, Inc. (NYSE:PGN) noted in a press release that it will be working over the next 30 days to determine the nature of the issues and the potential remedies; however, it declined to provide any additional comments to questions investors and analysts had.
Until more clarity is provided, it is difficult to draw any conclusions on what the final outcome will be. However, this announcement now places uncertainty on:
1) existing transactions that are currently awaiting Investment Canada approval
2) potential takeover targets in the E&P and oil sands space
3) future investment in Canadian resource assets.
With increased takeover activity in the resource space, and uncertainty related to the government’s net-benefit analysis, it is necessary for clearer guidelines to be published as a framework for evaluating current and future deals. Transparency of Investment Canada’s “Net Benefit” test has been the biggest concern, as there are many “grey” areas in evaluating deals (e.g., no specific weighting to factors evaluated, nor is any single factor the final determining one).
Investors eagerly await new information on this development, but in the meantime we expect the shares of Progress Energy, Inc. (NYSE:PGN) and other related companies will trade lower on Monday, given the uncertainty around the government’s position on foreign takeovers. Many of the gas-weighted companies with Montney exposure have traded up in recent months, on the back of the PETRONAS/Progress deal, as well as continued interest from Foreign Nationals and Multinationals looking to secure resources for planned LNG projects off the West Coast of Canada. This new development will certainly impact how the market values these companies.
Exxon/ Celtic Exploration Ltd. (TSE:CLT)
1) Deal size. Celtic Exploration Ltd. (TSE:CLT) transaction valued at $3.1 bln vs. PRQ at $5.9 bln, and Nexen Inc. (NYSE:NXY) (TSE:NXY) at $15.1 bln.
2) Exxon Mobil Corporation (NYSE:XOM) is already an active operator in Canada and not a state-owned entity. Exxon Mobil Corporation (NYSE:XOM) has been active in Canada for decades, in both the oil sands and conventional E&P development (e.g., Horn River and Cardium). The company has a ~70% ownership in its Canadian subsidiary Imperial Oil (IMO-TSX).
If the transaction runs into regulatory hurdles, it could ultimately use this vehicle to acquire CLT. Comparing the three pending deals, the CLT transaction has the lowest risk in terms of getting government approval.
Why Nexen Inc. (NYSE:NXY)/CNOOC is different:
There are several distinct differences between Nexen Inc. (NYSE:NXY) (TSE:NXY) and Progress and it is hard to see how the government could rule against the CNOOC Limited (HKG:0883) (NYSE:CEO)/Nexen Inc. (NYSE:NXY) (TSE:NXY) deal being a “Net Benefit” to Canada for the following reasons.
1) Nexen is an international company with less than 30% of its production sourced from its Canadian assets.
2) CNOOC Limited (HKG:0883) (NYSE:CEO) wants to invest billions of dollars in a suboptimal oil sands project (Long Lake), which may not get fully developed otherwise, or at least not in the same time frame under CNOOC’s control.
3) CNOOC Limited (HKG:0883) (NYSE:CEO) wants to retain all staff and management and set up CNOOC’s North and Central American headquarters in Calgary, and list CNOOC shares on the TSX, which is a clear positive for Canada.
Disclosure: No position in any securities mentioned