FYI:
M&A easier than E&P
Friday, 8 December 2006
WHEN Irish-based Tullow Oil lobbed into Australia in late September and
made a takeover bid for Hardman Resources at a 51% premium to what the
stock market thought it was worth, investors were caught by surprise and
many analysts were left with red faces. By EMMA FERGUSON
Besides putting the mid-cap oil and gas sector in the spotlight as a
target for local and foreign takeover activity, the move prompted a
re-rating of other stocks and prompted some key broking houses to pay
more attention to the sector. For instance, Deutsche Bank initiated
coverage of AED Oil, issuing a Buy recommendation.
The renewed interest encouraged private oil and gas companies to take
advantage of the attention. They hired investment banks to advise on
capital raisings and initial public offerings.
The most notable would have been a float by Perth-based oil and gas
business Coogee Resources, which appointed Goldman Sachs JBWere and
Credit Suisse to raise $300 million in capital to fund the $450 million
development of its flagship Montara oil project in the Timor Sea.
Coogee was to go public before in what would have been an $800 million
company with parent company Coogee chemicals retaining 60% of shares.
But it withdrew when a cooling investment market resulted in "a price
not attactive to the company and its shareholders".
However, further consolidation will proceed regardless. The issue is who
will be the predators and who the prey.
Australian mid-cap oilies are still trading at only slight premiums to
most analysts' estimates of net present value. In addition, most of the
mid-caps have strong balance sheets with cash reserves forming a big
part of the valuations. To remain more than a cashbox, any such company
must boost its reserves.
To date, there's been limited activity in the sector. Arc Energy took
over Voyager in June last year, Beach Petroleum acquired Delhi Petroleum
a few months ago and Arrow Energy took over CH4 Gas.
There have been a faield hostile takeovers, including Anzon Australia's
bid for Nexus Energy, Santos' bid for Delhi, Queensland Gas Company's
bid for Sydney Gas, and now Santos' bid for QGC.
Wilson HTM oil and gas analyst John Young says companies such as Santos,
Beach Petroleum and Origin Energy have plenty of cash, their market
capitalisations have ballooned due to soaring oil prices, and they are
under pressure to replace reserves.
With exploration becoming increasingly expensive and subject to time
lags, it's becoming less attractive to do it themselves and more
attractive to buy smaller operators to do it for them.
"Santos will not stop at QGC. It will look at other opportunities in the
oil and gas sector," Young said.
"The mid-tiers have three options. One is to buy a company with
exploration acreage. A second option is to buy a company with existing
reserves that have not been commercialised yet. The third is to acquire
a company that has access to areas."
Southern Cross Equities oil analyst Peter Chapman believes the premium
paid for Hardman, despite its inferior reserves position, suggests
stocks such as AWE and Roc Oil are as much as 15% undervalued.
And as Tullow's move on Hardman shows, it's not only local players but
also overseas corporates and private equity who will pounce on
underpriced assets.
The last trading correction in resources proved to be a catalyst for
large-scale merger and acquisition activity. If shareholders opt to sell
on takeover offers, Australia will be cleaned out of its mid-cap
resource sector.
On July 14, when the resources boom faltered and oil prices fell 24%,
the sector looked very cheap, but activity has since picked up. Beach
Petroleum took advantage of the situation by counter-bidding Santos for
control of Delhi Petroleum.
By offering $100 million more for the company, Beach managing director
Reg Nelson tripled its oil and gas reserves. Then on September 25,
Tullow bid $1.5 billion for Perth-based Hardman Resources.
It is understood that Hardman had been talking to at least two other
companies - Dana Petroleum and Premier - about a possible sale before
accepting the Tullow bid.
This means companies that made unsuccessful approaches to Hardman are
looking for other options. Roc Oil - with its projects in Mauritania,
Equatorial Guinea and Angola - is an obvious target, according to
analysts.
"The hot spots for oil at the moment are Africa, Gulf of Mexico and
possibly offshore China, and companies with those sorts of assets are
more favoured than someone who has all their assets in Australia," a
Sydney-based energy analyst says.
Another possible takeover target, Nexus Energy, looks especially
attractive because its Echuca Shoals and Crux projects offer backdoor
entry to Australia's booming liquefied natural gas sector. It was this
exposure to LNG that prompted Anzon Australia to launch a hostile
takeover bid for Nexus earlier this year.
Companies such as Tap Oil and Arc Energy are unlikely to be takeover
targets in the short term due to their depleting reserves, but because
they have moved into production and therefore have solid cash flows,
they could be aggressors for smaller operators. This would be a good fit
because companies with exploration permits generally do not have
significant amounts of cash so they have to either go to the market to
raise capital or merge with a bigger player.
For this reason, consolidation is not likely to be confined to the
mid-caps. There are plenty of incentives for juniors to also follow
suit. Capital is needed to develop assets and sometimes mergers are more
attractive than farm-outs or capital raisings.
Higher capital costs, skills shortages and the need to capture investor
attention in an increasingly crowded market are just a few reasons why
juniors might join forces with mid-cap operators.
Globally, a new round of consolidation seems sure to take place. Royal
Dutch Shell's decision to simplify its North American business by
bidding $7.7 billion bid for the minority shares in its 78%-owned
Canadian unit, Shell Canada, has prompted speculation that it is part of
a grand plan to merge with BP to create a mega-oil company worth almost
$600 billion.
There's no doubt it is becoming increasingly difficult for the major oil
companies to grow oil reserves by new discoveries and it is easier, and
cheaper, to buy production through the equity market than to commit to
costly new drilling projects.
"Shell has had some major problems with reserves downgrades and
declining production levels in recent years," says Southern Cross
Equities director Charlie Aitken.
"In addition, earlier this year BP acknowledged it had been looking at
the idea of a merger as part of scenario planning.
"I think we are on the cusp of a round of global oil mergers, with oil
companies generating massive cash flows and share prices still
underperforming after the recent sharp global correction of resource
stocks."
HDR
hardman resources limited
