Malaysia's Petronas to buy partner Progress Energy for $5.5 billion

CALGARY – Malaysia’s state-owned oil and gas company is offering $5.5 billion in a friendly deal to buy Progress Energy Resources Corp., its Canadian partner in northeastern B.C. gas fields, with an eye to exporting natural gas off the West Coast.

Petronas said Thursday the deal will strengthen its position as a supplier of liquefied natural gas — gas that has been chilled into a liquid state, enabling it to be shipped overseas by tanker.

Progress Energy (TSX:PRQ) chief executive Michael Culbert said his company requires a big investment to get into the international LNG markets.

“Petronas offers the size and scale that will enable our company to continue to grow and not be limited by the same cash flow challenges faced by many producers in the North American natural gas market today,” he said in a release.

The two companies have already been working together on a project to tap natural gas in northeastern British Columbia’s Montney region and had been studying shipping it abroad as LNG.

The companies announced along with the deal that they’ve selected Prince Rupert, B.C., for the location of its proposed LNG terminal.

Petronas is offering $20.45 per share for the Calgary-based company.

That’s 77 per cent above the price of Progress Energy stock at the end of trading Wednesday on the Toronto Stock Exchange. Progress shares soared after the announcement, closing up $8.50, or 74 per cent, at $20.05.

There’s a lot of potential upside for Petronas, based on the thousands of wells Progress has yet to drill and the reserves that it has yet to book on undeveloped land, said Brook Papau, with ITG Investment Research in Calgary.

“I think there’s a little bit of sticker shock maybe on the price, but I find that pretty justifiable and a pretty fair deal from both sides,” said Papau, who a little over a month ago predicted a take-out value of $20.13 per share — not far off from the Petronas offer.

He said the deal is more about Petronas “locking up the resource” for itself than coming to the rescue of a company struggling with low natural gas prices.

“Progress never really got hammered with everyone else when natural gas pricing started going down,” said Papau, adding the joint-venture deal already in place with Petronas helped on that front.

The Progress board recommended shareholders accept the Petronas offer, which includes a commitment to keep all of the Canadian company’s employees.

“It’s an unbelievable bid, and yet it’s not surprising,” said David Taylor, chief investment officer of Taylor Asset Management.

Before starting his own fund earlier this year, Taylor managed $8.5 billion at Dynamic Canadian Value Fund, then the second-biggest shareholder in Progress, behind the Canadian Pension Plan Investment Board.

“(Progress) did everything right and they’ve made a lot of money for shareholders and they should be very proud,” he said.

Making natural gas-focused investments these days is “very contrarian,” with many market players focusing on negative short-term factors like weather and storage levels.

But Taylor said “the long-term story for natural gas is phenomenal” — something state-run Asian companies recognize.

“They have an insatiable appetite to satisfy the masses and frankly they’re more than willing to make significant bets and think long term,” said Taylor.

The transaction requires approval from Investment Canada, the Competition Bureau and shareholders, the companies said.

The fact that Petronas is state owned will not necessarily be an impediment in the federal review, said Natural Resources Minister Joe Oliver.

“We want them to act on a commercial basis, we would like them to retain Canadian employees and Canadian board representation. We’re looking at each investment on a case-by-case basis,” he told reporters by teleconference from Israel.

Natural gas prices in North America have been below US$3 for a long time now, making it difficult for many producers to turn a profit. But in Asia, where countries are clamouring for supplies to feed their booming economies, prices can be three to five times higher.

Progress and Petronas have not been the only ones exploring the option of shipping LNG off Canada’s West Coast.

In May, Royal Dutch Shell PLC and three Asian partners announced plans to build a liquefied natural gas export terminal in Kitimat, B.C.

The Anglo-Dutch energy giant will have a 40 per cent stake in the project, called LNG Canada. PetroChina, Mitsubishi Corp. and Korea Gas Corp. will each hold a 20 per cent interest. No price tag was disclosed.

Encana Corp. (TSX:ECA) and U.S. partners Apache Corp. and EOG Resources plan to start up their Kitimat LNG plant in 2015, with an initial capacity of five million tonnes a year.

Another proposal called BC LNG, owned by the Haisla First Nation and Houston-based LNG Partners, expects its first shipment in 2014.

Talisman Energy Inc. (TSX:TLM), Nexen Inc. (TSX:NXY) and Imperial Oil Ltd. (TSX:IMO) are in the early stages of weighing LNG projects of their own.