Energy-sector names on the Toronto Stock Exchange posted losses Monday as investors reacted to the Canadian government's unexpected weekend move to block Malaysia's Petronas from taking over Calgary natural gas firm Progress Energy.

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.

Speaking to reporters in Ottawa on Monday, Prime Minister Stephen Harper said "there is a… response period of 30 days … so we are not going to say anything that would prejudice that particular discussion during this time."

Reaction on the stock market was not so neutral, however.

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.

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. On Monday, Nexen shares closed down $1.11, or 4.41 per cent, at $24.04 in Toronto.

Doubt cast on Nexen deal

"To me, the net benefit was higher with Petronas than it is with CNOOC," senior portfolio manager Laura Lau of the Brompton group said.

Progress Energy ended the day down $2.01, or 9.28 per cent, at $19.64. Petronas shares sold off even more, down 13 per cent in early trading Monday. The TSX energy sector as a whole was off 1.43 per cent. Large names such as Encana Corp. and Talisman Energy, which would normally be unaffected by setbacks at other firms, were both off by four per cent.

Shares in Celtic Exploration, which agreed last week to be taken over by U.S. powerhouse ExxonMobil Corp., 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.

"We believe rejection by the Canadian government will send a chill through the oil and gas equity markets, which will likely linger until there is a resolution," Macquarie Research said in a statement Monday. "Clearly, the impetus is on the government to define what ‘net benefit’ means. In the meantime, deal flow is likely to ebb until there is further clarity," the bank said.

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 the deals were different. 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.

'Cooler heads might prevail.'—Ian Nakamoto, head of research, MacDougall, MacDougall and MacTier

"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.