Petronas invests $5.4 billion in Canada's shale gas glut

The flurry of deals from Malaysia continued on Friday, when executives from national oil and gas company Petronas signed an agreement in Calgary to buy its Canadian partner, Progress Energy Resources, for C$5.5 billion ($5.4 billion).

The proposed deal, which is the biggest ever overseas acquisition by a Malaysian company, comes almost exactly a year after the two companies agreed to jointly develop three of Progress’s shale fields in the foothills of northeast British Columbia, as part of a plan to export liquefied natural gas (LNG) to Asia. Petronas paid $1 billion for a 50% stake in the venture, which represented 9% of Progress’s land holdings.

At that price, buying the whole company for $5.4 billion seems like a good deal for the opportunity to exploit North America’s glut of natural gas and ship it back to Asia, where prices are higher.

Even so, Petronas is paying a rich price — at C$20.45 a share, its offer came at a 77% premium to Progress’s previous closing price and represented a purchase price that is about 24 times higher than the company’s 2011 earnings.

“Petronas believes there are tremendous synergies with Progress as this acquisition will combine our global LNG expertise and market reach with Progress’s extensive experience in unconventional resource development,” said Shamsul Azhar Abbas, Petronas’s chief executive.

New drilling techniques have allowed oil and gas companies in the US and Canada to exploit shale fields that were previously too costly and too difficult to develop.

The boom in production has created its own problem — more gas than anyone dreamed of just five years ago. Without the ability to export large quantities of the stuff, North America’s gas rush has halved the price since 2008.

But the opportunity is clear: LNG sells in Asian markets at six to seven times the price in the US, and the only obstacle to exploiting that price gap is the lack of export capacity. Asian oil and gas companies are clearly keen to address that. PetroChina and Cnooc have also undertaken substantial shale gas joint ventures in Canada, as has India’s Reliance.

Malaysia has been brimming with work for investment bankers recently thanks partly to a lack of deals in China. During the past few weeks, IHH Healthcare and Felda launched initial public offerings for more than $5 billion in total; the national lottery operator announced plans to raise up to $2 billion by spinning off a unit to a Singapore-listed business trust; and Malaysia's state-owned export-import bank raised $500 million from its first US dollar bond issue.

On the Progress deal, Petronas retained Bank of America Merrill Lynch as financial adviser and Norton Rose as legal adviser, while Progress was advised by BMO Capital Markets and law firm Burnet, Duckworth & Palmer. Scotia Waterous gave a fairness opinion.