Now that natural gas prices have bottomed, the market for mergers and acquisitions in the energy sector is starting to really heat up.
That’s especially true in the realm of shale gas.
Assets that no one wanted to touch when gas prices were in a free fall have suddenly become enticing bargains as prices bounce back up.
Of course, China’s not the only one interested in shale assets.
These massive fields are both productive and well situated. That is, most shale development is taking place in Western markets like the United States, Canada, Europe and Australia – politically stable, pro-business countries that double as heavy consumers.
They’re also relatively cheap at current levels. So it’s no wonder energy majors with huge amounts of cash on their balance sheets are looking to pounce.
And investors should pounce, too, since takeover targets boast market-beating profit potential.
Remember, CNOOC offered $27.50 per share for Nexen, which is 61% more than the shares were worth prior to the offer. And premiums will only increase as the buyout war heats up.
So what’s the next mega-deal that’s going to be struck?
Here are some predictions…
Talisman Charms Potential Suitors
Right now, Talisman Energy (NYSE: TLM) is the hot pick among takeover speculators.
And it’s easy to see why.
The Calgary-based company is in a position similar to that of Nexen when CNOOC made its offer. That is, it’s in complete disarray.
The company reported a 72% decline in net income in the second quarter and a 10% drop in cash flow.
That led to the resignation of President and CEO, John Manzoni, who had captained the company for five years. He’s been succeeded by Hal Kvisle, the former president and CEO of TransCanada Corp. (NYSE: TRP).
Yet Talisman’s stock has surged 25% since CNOOC pounced on Nexen on July 23. That’s purely on speculation that it’s next in line for a takeover bid.
Is that speculation justifiable?
A quick look at the company’s assets shows it is.
Talisman’s second-quarter production actually rose 4% year-over-year thanks to its shale projects in Southeast Asia and North America. Shale volumes were up 50% from last year, with strong results in the liquids-rich Eagle Ford shale.
Eagle Ford production averaged 13,800 barrels of oil equivalent per day (boe/d) in the second quarter, up from 2,700 boe/d a year ago.
Meanwhile, Talisman is still drawing huge gas volumes from the Marcellus shale formation in Pennsylvania and New York, despite reducing its drilling activity there.
Finally, on the very day CNOOC signed its megadeal with Nexen, Talisman agreed to sell a 49% equity stake in its North Sea assets to Sinopec (NYSE: SNP) for $1.5 billion.
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So it’s definitely on China’s radar.
Elsewhere in Canada, the Calgary-based EnCana Corp. (NYSE: ECA) is another potential takeover target.
Like Talisman, EnCana saw a steep decline in earnings as natural gas prices bombed. But it also has a robust portfolio of holdings that includes the Tuscaloosa Marine shale stretching across Mississippi and Louisiana, the Utica/Collingwood formations in Michigan, the Eaglebine play in East Texas, and the Mississippian Lime in Oklahoma and Kansas.
PetroChina (NYSE: PTR) has already shown interest in EnCana and it could emerge as a potential suitor. The Chinese oil giant in June was prepared to dish out $5.4 billion for a 50% stake in EnCana’s Cutbank Ridge shale gas play. But the two companies couldn’t come to terms on an operating agreement.
Another deal could soon be in the works.
Digging for Bargains Down Under
Australia is another M&A hotspot.
Since Australians are so far removed from the North American shale boom, they don’t fully appreciate the profit opportunity it offers. As a result, Australian-listed energy companies with shale holdings are substantially undervalued.
Indeed, Australian exploration and development companies with shale holdings are valued at a 23% discount to their U.S. and Canadian counterparts, according to a recent Bloomberg report.
For example, Sundance Energy (PINK: SNYXF) just sold a stake in the Williston Basin in North Dakota for $172 million, when the company itself had a market cap of just $162 million at the time of the sale. And the company’s still holding acreage that’s worth five-times more than what’s reflected in its share price.
Then there’s Antares Energy (PINK: AZZEF), whose Southern Star field in the Permian Basin in Texas could fetch as much as $300 million in an asset sale – more than double Antares’ $130 million market cap.
Ironically, a potential suitor could be BHP Billiton (NYSE: BHP), which got burned on $20 billion worth of poorly-timed acquisitions last year. Prices for natural gas and other commodities plunged just as BHP stocked up on shale assets, forcing the company to scale back development plans for iron ore, copper and uranium.
Still, its petroleum division is expected to buoy earnings this year, and natural gas liquids could offer another lifeline.
Michael Yeager, head of BHP’s petroleum division, has said that natural gas prices of $3.50 per Btu would entice the company to mobilize and start looking for new takeover opportunities.
Bottom line: The natural gas rebound will usher in a flurry of M&A activity that will mean big profits for small or distressed companies. Investors should be ready.