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Petronas to buy Canada’s Progress Energy for $5.5bn

The company has agreed to buy the Calgary-based company, including the assumption of debt

Malaysia’s state oil company Petronas has made a multi-billion dollar bet on the future of Canadian liquefied natural gas (LNG). On 28 June, Petronas agreed to buy Calgary-based Progress Energy for C$5.5 billion ($5.34bn) including the assumption of debt.

At C$20.45 ($19.84) per share, the deal is a 77% premium to Progress’ recent trading price of C$11.55 on the Toronto Stock Exchange, offering an indication of the importance of the deal to Petronas’ Canadian LNG ambitions.

The companies also announced that their proposed LNG terminal will be sited at Prince Rupert, in northern British Columbia (BC) on Canada’s west coast.

Progress is considered an intermediate-sized natural gas player, producing about 250 million cubic feet per day (cf/d) in the first quarter of the year.

But it is one of the largest landholders in BC’s unconventional Montney play, with more than 820,000 undeveloped acres.

In June 2011, Petronas paid Progress C$1.07bn to acquire a 50% stake in the north Montney assets and agreed to explore the feasibility of building an LNG terminal. Thus the deal all but affirms the outcome of the study, and that Petronas feels Canadian LNG is indeed economic to pursue.

Upstream operations will continue to be based out of Calgary, while a downstream LNG office will be opened in Vancouver. Progress president Michael Culbert said the deal would allow continued development of the Montney assets while ensuring adequate funding to proceed with the LNG option.

“Our asset base requires extensive capital to develop its large potential and ultimately access international LNG markets,” he said. “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.”

The deal has the support of the Canada Pension Plan and Progress’ board of directors, which own about 25% of the outstanding shares. Even so, it requires approval under the Canada Investment Act, which must review all foreign takeovers worth more the $330m to determine if they are in the national interest.

Though it is considered a formality, the federal government has used the legislation to block high-profile deals such as Australian mining giant BHP Billiton’s proposed takeover of Potash Corporation in 2010.

Chinese state firms have tried to get around the review requirements by partnering for minority stakes in joint ventures and specific projects.

If approved, Petronas would only be the second direct takeover of a Canadian oil and gas firm by a state-owned entity. In 2009 Korean National Oil Company paid $1.8bn to acquire Calgary-based Harvest Energy.

In a statement, Petronas argued the deal will be a “net benefit” to Canada.

“The proposed transaction will combine Petronas’ significant global expertise and leadership in developing LNG infrastructure with Progress’ extensive experience in unconventional resource development to build a strong and growing world class energy business based in Canada,” said Datuk Anuar Ahmad, Petronas’ vice-president of gas and power. “This development will generate substantial economic benefits for the provinces and local communities, as Petronas’ access to capital will help to bring Canada’s abundant and clean-burning natural gas resources to global markets, leveraging our well-established and extensive network of customers worldwide.”

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