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Nexen/CNOOC, Progress Energy not the end of Canada’s resource deals

Canada okayed two major acquisitions in the energy sector by foreign state-owned enterprises, while signaling a tougher stance on similar deals in the future. That set off speculation on the future of mergers and acquisitions in the country's prized energy sector. Experts say the move shouldn't stifle deal-making activity in the long term.

It's simple, the argument goes: Canada needs some $650 billion to exploit the resource and it needs foreign capital in order to get projects done. Moreover, the energy sector reflects a major growth play going forward as emerging markets bulge in power.

"The Canadian energy sector is going to be one that is rife with a lot of deals going forward. Not necessarily international players acquiring Canadian assets, but collaboration amongst domestic players, joint ventures and partnerships," said Craig Fehr, Canadian market strategist at Edward Jones.

"As the prospect of returns improve you're going to see whole lot more private capital that's interested in the industry," he added.

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After the market close on Friday, Ottawa approved the $15.1-billion takeover of Nexen by China's CNOOC Ltd. and the $5.2-billion takeover of Progress Energy Resources by Malaysia's Petronas.

After months of reviewing the two deals, the federal government also outlined fresh, tougher foreign-investment guidelines on acquisitions by foreign governments and their state-owned enterprises.

The decision sparked speculation that foreign investment in Canada's resource sector will cool, and to be fair the jury is still out on that. But some market experts think even if there is a chilling effect it won't last for too long.

If shares moves on Monday are any gauge, that theory may hold. By midday, the broader energy sector was higher, with shares of Nexen and Progress climbing by more than 10 per cent on Toronto's S&P/TSX composite index.

"The Canadian oil, energy business as a whole is wide open for opportunities for investments by foreign investors and foreign, sovereign-owned entities," said Greg Turnbull, a partner at McCarthy Tétrault who specializes in the oil and gas sector.

Furthermore, Turnbull said a "post quantitative easing" world could lead to inflation, which may further support deal making in the sector.

"The investment theory is what is the best asset to hold as we may enter an inflationary period. The world is saying a barrel of oil in the ground is not a bad bet," he said.

"People from everywhere in the world, whether they're sovereign wealth funds, whether they're private investors, pension funds, are all looking at this as a good investment for the long term if we're going into an inflationary environment."

New foreign investment rules

Ottawa will raise the threshold at which it reviews foreign takeovers by private-sector bidders to $1-billion, but it will keep the bar at $330-million for foreign state-owned enterprises. The changes in the rules are, in part, aimed at protecting big domestic oilsands players like Suncor Energy and Canadian Natural Resources, putting them essentially off-limits to state-owned entities.

Canada welcomes foreign investment generally, however, and is even keeping the door open to capital from state enterprises. Hurdles will be higher where control of a domestic company is at stake. That's why the energy sector may see more small stakes or joint ventures, experts say.

"The likely trend that's going to come out of this is more smaller investments and lots of joint venture arrangements," said Reynold Tetzlaff, the Canadian energy leader at PricewaterhouseCoopers.

"We're taking in the investment and we're allowing them to participate in the asset and the operation but we're not losing control. That's key to future investments, particularly in the oil sands."