Is Canada's Energy Sector Fertile Ground For Foreign Investment?

Includes: CEO
by: Kathleen Wailes

Last Friday, it was announced that the Canadian government approved two major transactions that will significantly impact the nation's resource-rich energy sector. The first was CNOOC's (NYSE:CEO) (Chinese National Offshore Oil Corporation) $15.1 billion takeover of oil and gas producer Nexen (NXY) - a deal that represents China's largest overseas energy acquisition to date. The second was Malaysian-owned Petronas's $5.25 billion takeover of Alberta-based Progress Energy.

Both deals were sources of heated debate among Canadian lawmakers concerned about how much of the nation's energy sector ought to be controlled by foreign interests. For some time now, CNOOC and other large, state-owned Asian energy companies have been aggressively purchasing oil and gas assets in the Americas as part of a global strategy to gain access to the energy resources needed to fuel their economies. In many of these cases, foreign capital has been essential to developing these domestic resources. But, these two new deals notwithstanding, it seems that we've reached the tipping point at which Canadians are asking themselves just how much foreign-control is too much.

The answer to that question will have far-reaching consequences for energy companies around the world. Right now, the Canadian province of Alberta is home to the world's third-largest oil reserves behind Saudi Arabia and Venezuela. The 15 companies that dominate production in the Alberta oil sands represent 60 percent of all the oil production in the world that is not state-controlled. As such, it is no wonder that foreign energy companies are seeking to leverage the takeover opportunities still available in Alberta, British Columbia, and other Canadian provinces.

But what are the chances that the next suitor will find the Canadian government as receptive as it was last week? There are two schools of thought.

The first is driven by Canadian Prime Minister Stephen Harper's announcement that new guidelines are now in place to evaluate bids for Canadian energy companies made by state-controlled companies. Chief among those guidelines is a new emphasis on the level of influence exerted over the bidding enterprise by its government. Even if the enterprise demonstrates substantial independence, it looks as if future bids will only be approved under "extraordinary circumstances."

When announcing the guidelines, Mr. Harper issued some tough talk as well - saying that the CNOOC and Petronas deals "are not the beginning of a trend, but rather the end of a trend" and that "When we say Canada is open for business, we do not mean that Canada is for sale to foreign governments."

There is also a chance that target companies within Canada will leverage newfound nationalism among lawmakers as a pseudo poison pill to ward off resource-hungry foreigners attempting a hostile takeover. When taken with the Prime Minister's comments, it seems there are both public and private sector obstacles that foreign state-owned companies will have to surmount if they hope to access Canadian resources in the future.

At the same time, however, the approval of the CNOOC and Petronas deals alone provide some reason for optimism among those companies seeking an energy foothold in Canada. CNOOC promised the Canadian government a number of beneficial undertakings to help push approval of its deal through. Therefore, it seems that the door may still be slightly ajar for companies willing to make some significant concessions in return for Canadian access.

Just how many concessions will constitute "extraordinary circumstances" remains to be seen; but what is clear is that any state-owned energy company looking at Canada as fertile ground for investment is going to have to make a strong case that any proposed deal does indeed represent a rising tide that lifts all ships. To win approval, the Canadian public is going to have to recognize the tangible benefits it will reap as a result of the transaction.

The bar will be high; but not out of reach for those potential acquirers willing to do what's necessary to demonstrate that the deal is in Canada's best interests.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.