I have lifted the item below from a poster on iii board whom we should thank for their efforts
Eni’s announcement of an offer for Burren suggests the industry is moving to higher oil prices than the equity markets are currently discounting. The deal may be just asset specific, however we think that there is a risk that this may accelerate a “grab for assets” by the IOCs and lead to another round of consolidation among the UK E&Ps..... Burren management has indicated that it is holding out for an improved offer from Eni or a competing bid. However, we believe the market is already discounting this outcome and we see limited upside from the closing price of 1180p/share......
With perceptions of rising oil prices and increased M&A in the industry, we argue the share prices for the E&Ps will trade towards our bull case valuations. The bid by Eni brings the end game nearer for Burren, in our view. However, we still see significant upside for other names in the sector. Our top picks are Tullow, Dana and Soco.
It is worth noting at this point that MS's "bull case" valuations are revealed later in their note as: 1031p for Tullow, 1707p for Dana and 3510p for SOCO...... ......I could therefore "handle" the sort of outcome they suggest :-)
They expand further on this: We have seen a number of deal approaches and transactions over the last 12 months in the UK E&P sector. Tullow acquired Hardman Resources; Premier received a failed bid approach at the end of last year; and Dana recently acquired Devon Energy’s assets in Egypt and Ener Petroleum in Norway. Cairn also made cash offers for Plectrum and MedOil to expand its Capricorn business. However, Eni’s approach for Burren highlights that the larger E&P companies are also potential targets themselves. With an increased risk from M&A in the sector, we believe it is highly likely that the E&Ps will trade towards our bull case valuations..... Historically, companies have made multiple offers in E&P bid situations, and the market will wait to see what the next move will be from Eni and the other companies that have also recently approached Burren. Value is in the eye of the beholder. With so many variables in the E&P valuation from oil prices to discount rates and recovery factors, a willing bidder with a strategic interest and a public bid can justify prices that at the time appear full. With an all cash offer from a credible buyer at 1050p, we see this as an end game situation for Burren. The issue now is as much about the determination of the bidder and the ability of management to create an auction as it is about our disconnected view on value. .... However, the market should not expect the party to rage on and on. The last competitive situation Eni found itself in was an approach for Enterprise Oil. It walked away when Shell entered the race. Burren is smaller, but we would not expect Eni to trump a counter bid. We advise investors to hold out for one raised offer or one credible counter bid. At the current price, we would not buy shares in Burren as we believe exactly that situation is already largely discounted...... The last time we saw a wave of consolidation in the UK E&P sector was around 2000, when we saw a number of E&P companies acquired including British-Borneo, Lasmo and Enterprise Oil over a 2 year period. At a glance there is a huge difference - the oil price was recovering from the collapse to $10/bbl in 1998-99 and E&P companies were recovering from perilous financial positions with $80/bbl life is somewhat different. However, there is a key similarity. Although prices were lower, as they recovered some oil companies took a view on oil prices that was more optimistic than the equity market. We think the same is happening today. Capex programs and some corporate behaviour would suggest that some of the integrateds believe in a higher oil price than the market appears to be prepared to discount. Add to that a fear that NOCs and or Middle Eastern or other emerging market capital will look to the UK E&P sector for energy investments and the case for being early to a round of consolidation becomes compelling. We believe Burren is entering an end game with a raised offer or a single counter offer quite possible, but significant appreciation above the current price unlikely. The bigger question is whether this signals the start of a dash for assets and a wave of consolidation as it has in the past or whether the M&A we have seen in E&P is just asset specific. Precedent in this sector, high oil prices and new competitors on the block makes the former a real possibility, In that environment we think the other E&Ps are likely to trade towards our bull cases with expanding premia to core values. At the very least the skew of risk has just changed substantially. Our top picks are Tullow, Dana and Soco.
Not for the first time, I think they're spot on with their thoughts here.
We won't have too long to wait to find out if they are right, IMO.
HDR Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held