Late Friday,Industry Canada announced it would block Petronas's $6-billion takeover of Progress on grounds that it would not have been a "net benefit" to Canada.
"It's going to be very tough," senior portfolio manager Laura Lau of the Brompton group said. "It could be a bloodbath."
Ottawa nixed the takeover, which had included a 90 per cent premium to where Progress shares were trading before the offer, but left the door open to accepting the deal down the line if it is altered and certain unnamed conditions are met.
"I was very surprised to see Petronas blocked," Lau said, adding she expects all energy sector names and anything with a takeover in the works to sell off Monday.
Progress and Petronas both issued diplomatic statements expressing their hope that a deal can yet be worked out, but the move does not augur well for another closely watched oil patch deal, the China National Offshore Oil Company's $15-billion takeover for oil firm Nexen Inc.
Ottawa is set to rule on that takeover by Nov. 9. When markets opened on Monday, Nexen shares were off by more than five per cent out of the gate.
Doubt cast on Nexen deal
"To me, the net benefit was higher with Petronas than it is with CNOOC," Lau said.
Petronas shares sold off even more, down 13 per cent in early trading Monday. The energy sector as a whole was off roughly two per cent.
Other market watchers were less bleak.
Nomura analyst Sonia Song said she was interpreting the blocking of the Progress deal as an automatic red flag for Nexen because Malaysia was attemping to buy control of a 100 per cent Canadian asset, whereas only about 30 per cent of Nexen's assets are Canadian.
"At first glance, the implication appears negative regarding the CNOOC/Nexen deal," Song said. "However, having issued the verdict on Petronas-Progress, the Canadian government said each foreign deal would be evaluated on its own merit and the Petronas-Progress decision is not a precedent for other rulings."
"It's not as bad as people expect — there are definitely signals the deal is not dead as there are a bunch of conditions they could still meet," said Ian Nakamoto, head of research at MacDougall, MacDougall and MacTier.
"Cooler heads might prevail," he said.
Nakamoto said the setback for Progress shouldn't be viewed as an automatic negative for CNOOC's Nexen deal.
"CNOOC's deal was better thought out in terms of making concessions to Canada's political climate," he said.
"CNOOC has more experience operating around the world, and they know in order to win some deals you have to make compromises," Nakamoto said.
The Petronas news also weighed on the loonie, dragging it more than a tenth of a cent lower to 100.53 cents US.
"The perception that Canada is closed to foreign acquisition would be negative [psychologically] for [the Canadian dollar]," Scotiabank currency strategist Camilla Sutton said in a note.