Progress and Petronas said they're meeting with Industry Canada officials to "better understand" what the government's requirements are with respect to the deal.
"Petronas and Progress will work together to ensure that the minister has the necessary information to determine that the proposed acquisition of Progress would likely be of net benefit to Canada," the companies said in a release.
Three minutes before midnight on Friday, Industry Minister Christian Paradis announced the transaction did not pass the net benefit test imposed on large foreign takeovers of Canadian companies — a process widely criticized for its lack of clarity.
Petronas has 30 days to amend its deal and send it back to Ottawa for review.
Analysts at CIBC World Markets give 25 per cent odds to the deal being saved and say there's a 50 per cent chance another multinational oil company comes along if the Petronas deal fails.
A source familiar with the matter said odds are "extraordinarily high" the deal ultimately gets done. Before Friday's bombshell, the person would have put the likelihood of a green light at 99 per cent, but the "ruffled feathers" make it more like 95 per cent now.
"I'm sure there are people who are very offended and there's guys getting on a plane in Kuala Lumpur who weren't expecting to spend their week in Ottawa."
After Progress accepted Petronas' initial $20.45-per-share offer this summer, another unidentified bidder swooped in with a rival bid. Petronas trumped the competing offer by sweetening its bid to $22 per share.
If the Petronas deal falls through, the likes of ExxonMobil or U.K. gas giant BG Petroleum are potential buyers, the CIBC analysts said.
They said it's not likely the government's quibbles centred around things like job promises or reciprocal market access, suggesting the decision may have had more to do with Ottawa positioning itself for the much more politically troublesome $15.1-billion takeover of Calgary-based Nexen Inc. (TSX:NXY) by China National Offshore Oil Co.
One theory is that the government will ultimately approve a tweaked Progress-Petronas deal, but wants to make it look like it's being tough on foreign investment so that it has more credibility when it waves through the CNOOC-Nexen one.
"Another theory is that the government does not want to be seen as anti-China and easily approving the Progress-Petronas deal would make it look like the government's issue is primarily with China as opposed to the national oil company business model and other concerns."
There were reports that Industry Canada asked Petronas to allow it to extend its review for a second time, but the Malaysian company refused.
Whatever the reason, the analysts say it's "bad news for Canada."
"Global investors have already been struggling with why they need to own Canadian energy and this announcement clearly does not help," they said.
"After years of healing the wounds introduced by the Alberta government's disastrous royalty review and the royalty trust termination, the last thing global investors needed was a reminder that Canada is a risky political environment."
Investors punished Progress shares on Monday, pushing them down more than nine per cent to $19.64 in late afternoon trading on the Toronto Stock Exchange.
Other Canadian energy players with deals in the works — notably, Nexen and Celtic Exploration (TSX:CLT) — were also dragged down by the surprise news.
Nexen was off more than four per cent to $24.04. A review of the CNOOC-Nexen deal by Industry Minister Christian Paradis is set to end on Nov. 11, though it can be extended by 30-day increments with the buyer's consent.
Shares in Celtic, which agreed last week to be taken over by U.S. powerhouse ExxonMobil Corp. (NYSE:XOM), were down 1.4 per cent to $25.83. Unlike the other two deals, ExxonMobil is a publicly traded independent company with a decades-long history of operating in Canada.
While the NDP has not taken a stand on the Progress-Petronas deal, it has raised red flags about CNOOC's environmental and human rights record and urged Ottawa to block the deal.
But the process under which both transactions are being handled by Investment Canada is cause for concern, said opposition natural resources critic Peter Julian.
"It is mystifying how any Conservative can think they have economic credibility when they make the decision behind closed doors at midnight on a Friday night. Did the minister flip a coin?" he said in Ottawa.
"And now three days later we have no further idea as to what went into that decision. That is no way to run a Canadian economy."
Interim Liberal Leader Bob Rae said the government's "complete lack of transparency" in the decision is a major problem.
"Decisions that are made in secret and are made by the (Prime Minister's Office), are not decisions that build confidence for anyone — not for the people who are against the investment or the people who are making the investment," he said in French.
"Nobody knows exactly why the government decided to do what it did."
The Canada Pension Plan Investment Board, Progress' top investor, was predictably disappointed.
"We think that it is unfortunate that this transaction was not approved as anticipated. CPPIB continues to believe that there is substantial intrinsic value in Progress Energy and that this proposed acquisition is of long-term benefit.“
Gavin Graham, president of Graham Investment Strategy, said one would think a big boost to the national pension plan would be considered a net benefit to Canada.
"You've actually shot yourself in the foot," he said.
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