Takeover fever spreads to junior oil sector Salamander Energy’s ( LON:SMDR) decision to put itself up for sale has highlighted it is not just big pharma where deals are rife.
Salamander originally intended to sell stakes in just two assets: Bualeng in Thailand and the Kerendan gas field in Indonesia.
But having started the ball rolling with these, Salamander received approaches for the whole company and has now appointed Goldman Sachs to handle the sale.
A day earlier, Heritage Oil ( LON:HOIL) agreed a £924mln bid from a Middle East consortium while Ophir Energy ( LON:OPHR) reportedly has twice been rebuffed by Premier Oil ( LON:PMO).
While not on the scale of multi-billion pharma deals, they are meaty enough for analysts to suggest the much-awaited and predicted consolidation among the junior oil sector has begun.
Many, if not all AIM or small cap-listed juniors, trade at substantial discounts to their net asset values or the estimated oil worth of their oil in the ground.
While this applies equally to other sectors, in oil it is especially pronounced.
Ashley Kelty, an analyst at Cenkos Securities, said the recent activity it is definitely the start of a trend.
“It’s something that everyone has been talking about for years, but what has held it up has been managements who have been wedded to unrealistic historic valuations.”
As the market isn’t open for equity and debt isn’t readily available, a takeover may be the only exit route, he adds.
“Salamander is particularly interesting as it was only looking to sell assets but unearthed a bidder for the whole company.”
Dougie Youngson, at Finncap, concurs that the recent deals are part of a larger trend among junior oil and gas groups: “We are at the stage now where valuations are so bombed out that people are looking to consolidate in the sector.”
“If you want buy some production or expand your portfolio, you have to start doing deals.”
According to one observer picking targets is a bit like shooting fish in a barrel at present and because of chronic lack of capital for would-be growth firms many projects are under-funded,
If a junior has survived this far, the chances are that it will be standing at a large discount to its asset value, so in terms of economics almost all would, in theory, be viable purchases.
There is also no shortage of potential buyers.
A steady price performance from oil, which has remained more or less above US$100 per barrel, means many producers such as Genel ( LON:GENL) and Dragon Oil ( LON:DGO) are sitting on significant cash piles.
After raising US$500mln from the debt markets, Genel, for instance, is sitting on US$1.1bn and Oriel Securities reckons the group is ready to hit the acquisition trail.
“The cash pile and the bond issue are pointing to a similar size transaction,” said analyst Dragan Trajkov in a recent note to clients.
“If the company is indeed buying something (rather than just piling cash on its balance sheet) the question then remains what or who they are buying and at what price.”
Giant Royal Dutch Shell ( LON:RDSB) may also emerge as a key acquirer according to Youngson.
“It hasn’t done a decent transaction for three years and has such a huge cash pile it’s going to go one way or the other. Either it does one [a significant acquisition] or it has to ramp up dividend.”
As for targets, Youngson picks Ophir ( LON:OPHR) as attractive at the moment as is Afren ( LON:AFR), though her it could go either way, he adds.
“ Afren has been really quiet on deal front so could start to move for other companies, but it also looks quite attractive itself especially with the interest in Nigeria at present.” |
