On December 16, one of the worst kept secrets in the energy sector was finally made official. Spanish energy giant Repsol announced it was acquiring Canadian oil and gas producer Talisman Energy Inc. (TSX: TLM)(NYSE: TLM) for US$8 per share, a premium of some 75% compared to where the company’s shares were trading.
Repsol, which had been linked to Talisman for months, finally managed to pull the trigger. The message from the company’s management was obvious — it thinks that sub $60 per barrel crude isn’t here to stay.
If Repsol is right, buying Talisman at these prices could end up being the steal of the year. Back in September when EnCana Corporation announced its intention to acquire Texas oil assets by buying Athlon Energy, the price paid per barrel of production was five times what Repsol bid for Talisman. And that’s even after paying a 75% premium on Talisman’s share price.
If oil stays down in 2015, look for even more deals to happen in the oil sector. Here are a couple that seem likely.
Penn West
There are a lot of similarities between Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE) and Talisman Energy.
Both companies are in the middle of turnarounds, with selling assets and cutting debt high on the priority list. One of the reasons why Talisman was an attractive takeover is because a company with deeper pockets could afford to sit on its assets for a few years, choosing to develop them internally when energy prices recover, or sell them to a competitor with more strategic operations in the area.
A lot of the same things apply to Penn West.
The company has been working aggressively to sell non-core assets, having a reasonable success rate in 2014. But even though it has more than $10 per share in tangible book value, the market is beating the stock down because investors are concerned about its debt load. Plus, the company really needs $70 per barrel oil for it to be able to comfortably invest in new, lower cost production.
For Penn West, its debt of approximately $2 billion is hard to stomach. But for a bigger company with a much less levered balance sheet, taking on Penn West’s debt isn’t such a big deal. Perhaps asset write-offs are coming, but paying $4-6 billion for assets worth $10 billion is a pretty good deal, especially when crude inevitably recovers.
The only problem with a Penn West acquisition is the number of shareholders who have held the stock since its share price was in the double digits. These investors might not be happy taking a buyout offer at 50% above the current price.
Oil sands
There are a few smaller oil sands companies that could prove to be attractive takeover targets at this time.
Athabasca Oil Corp. (TSX: ATH) is one that looks interesting. Although the company doesn’t have much production to speak of at this time, it plans to have 12,000 barrels of oil per day worth of oil sands production and 16,000 barrels per day of production from the Duvernay region come online by 2016. Production from these two projects is expected to be 110,000 barrels per day by 2020.
But the real value of Athabasca comes from its reserves. The company currently has reserves of approximately 12 billion barrels while only having an enterprise value of $1.8 billion. Thus, investors are paying just 15 cents per barrel of oil in the ground.
For Athabasca investors, building the infrastructure to pull all this oil out of the ground seems daunting. Although the company plans to only spend $266 million on capital projects in 2015 — an amount easily covered by cash on the balance sheet — it’ll take many more millions before the company’s 2020 projection goal can be realized.
But for a bigger producer, spending on long-term projects isn’t a big deal, even in the current oil price environment. That makes Athbasca’s reserves very attractive, especially at these bargain basement prices. Acquiring Athabasca is a cheap way to get some pretty high quality reserves, which larger producers are always looking for.
