Progress Energy Resources Corp and Petronas said they will meet with Canadian officials to try to reverse the government's surprise decision late on Friday to block their $5.2 billion merger deal.
Petronas, the Malaysian state oil company, agreed on Monday to extend its deadline to close the acquisition of Progress, which has extensive exploration lands in the gas-rich Montney shale region of British Columbia, by up to 90 days.
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Canadian Industry Minister Christian Paradis said late on Friday that Petronas' friendly bid would not provide the "net benefit" the government seeks under foreign investment laws - a decision that shocked investors as the deal been expected to pass muster easily.
Progress shares tumbled 11.2 percent to C$19.21 in morning trading on the Toronto stock exchange, and other energy shares also fell as the veto prompted discussion about whether Canada, which needs hundreds of billions of dollars to develop its energy patch, was really open for foreign business as it frequently insists.
Shares of Nexen Inc fell 5.2 percent to C$23.84 on concerns about its proposed $15.1 billion takeover by China's CNOOC.
"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," said the two companies in a joint statement.
The government has given Progress and Petronas 30 days to make their offer more palatable. Progress said on Monday that it had waived a 10-day notification period, which would have effectively meant the deal expired at the end of this month.
Canada's move to block the deal, minutes before a midnight deadline, was a blow to Petronas, whose domestic oil supplies are shrinking. The company has been looking to boost its oil and gas resources beyond Malaysia and volatile areas such as Sudan.
A similar rejection of the CNOOC bid would likely damage trade ties Canada has been trying to build with China, underlining the political sensitivity to Chinese corporate expansion in North America.
But the fall in Progress shares was less steep than some analysts had expected, pointing to hopes that the deal would be revived in some form.
"I don't actually think it's that terrible a decision," said Jim Hall, chief investment officer at Mawer Investment Management Ltd. "It does seem a bit amateurish to do it at the last minute - it seems like they were panicking. But I'm not seeing huge downside. The downside would be if they deny everything and don't explain why. Then projects wouldn't get built or they take a very long time."
Petronas and Progress are planning a multibillion-dollar liquefied natural gas plant on Canada's West Coast. The Conservative government of Prime Minister Stephen Harper has been highly supportive of such projects as a way to wrest more value of Western Canada's massive gas reserves.
Malaysia's energy minister, Peter Chin, told Reuters on Monday that Ottawa's move was a setback for Petronas, but declined to say what his government's next course of action might me.
"I would say that any deal of such magnitude is important to Malaysia, especially Petronas as a worldwide operator," Chin said at an industry event in Singapore. "It would not deter Petronas from investing in other regions or other sources of energy, wherever Petronas can operate."
($1=$0.99 Canadian) (Additional reporting by Scott Haggett in Calgary, Seng Li Peng and Luke Pachymuthu in Singapore; Editing by Janet Guttsman and Andrew Hay)