No Progress for Petronas, Spells Carnage in Calgary

 Canadian Federal Government late Friday announced that it has denied Calgary-based Progress Energy Resource’s (PRQ) $5-6 billion take over by Malyasian state-owned oil compnay Petronas. The decision was unexpected as market perception was that this is a relatively small deal and Malaysia is no China and should be considered a friend rather then a threat.

Obviously Progress Energy stock is likely to get decimated when it opens for trading on the Toronto Stock Exchange on Monday morning. But more importantly it will send a very negative signal to other potential buyers that may be kicking tires of other Energy and even mining companies in Canada.

The industry Minister Chrisitan Paradis defended the government’s decision:

“I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada,” Paradis said a statement.

“Due to the strict confidentiality provisions of the [Investment Canada] Act, I cannot comment further on this investment at this time,” he said. Petronas now has 30 days to “make any additional representations and submit any further undertakings,” the minister said. “Subsequently, I will either confirm this initial decision or approve the acquisition.”

Although technically the government has given Progress Energy a 30 day life-line to change their mind it is unlikely the decision will be reversed.

Progress Energy CEO quite accurately highlighted the implications of this decision “The long-term health of the natural gas industry in Canada and the development of a new [liquified natural gas] export industry are dependent on international investments.”

Watch for double digit losses across the energy sector with built-in take over premiums in many energy companies evaporating and prices falling 20-30%. This will provide a good opportunity for investors to get better value for their money but the increased volatility and negative sentiment will keep energy companies under pressure in the immediate term.

We have a negative outlook on the energy sector and of course North American weather conditions will have an impact on Natural gas prices in the next few months.

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