Energy Deals Have Speculators Looking North
Dealmaking is back in the energy business.
The recently acquisitive Devon Energy (DVN) agreed Tuesday to buy Canadian exploration and production company Anderson Exploration (AXN) for nearly $3.4 billion in cash, a 50% premium to Anderson's closing price Friday.
The deal makes Devon the largest independent oil and gas producer in North America, and has some observers expecting a flood of similar deals. Devon dropped 4% Tuesday morning on concern it was overpaying for the Canadian company's assets; the deal will be slightly dilutive to earnings in the near term, Devon said.
Meanwhile, Santa Fe International (SDC) agreed to acquire Global Marine (GLM) for $3 billion in stock, a 16% premium to Global Marine's Friday close. The deal creates the world's second-largest offshore driller. Santa Fe dropped 8% Tuesday morning.
Falling Gas PricesBoth deals point to the rising prominence of Canadian natural gas companies, many of which are likely to be targets in coming months as other energy producers look to beef up. The only thing blocking a wave of deals is the uncertainty in the outlook for natural gas prices, analysts say. Analysts say Global Marine has likely been looking for an international partner to make its business less susceptible to the volatility in natural gas prices. Global stock has plummeted this year as natural gas prices have fallen. And while Santa Fe hasn't providing winning returns either, its international platform has provided some insulation for investors. "Global has been whacked in the last two months because of its natural gas and Gulf of Mexico focus," says Marshall Adkins, director of energy research at Raymond James and a member of the TSC Energy Roundtable. "Santa Fe has held up, at least relatively, as a result of its international oil exposure." Adkins notes it is possible that Santa Fe could choose to move some of Global's rigs, currently in the Gulf of Mexico, to more lucrative areas in West Africa or other oil-focused regions. And that may cause investors to respond favorably. "You will achieve synergies and have more efficient and flexible rig deployment with the merger," he says. Adkins doesn't cover either company, and his firm hasn't underwritten for either. However, he cautions investors on reacting to energy-services names based solely on takeover speculation. "I don't view it as a real investable concept," Adkins says. "Picking out the ones that may get taken over at a premium is a very difficult thing to do. People will try it, but it isn't necessarily a successful way to invest in the energy services sector."
Dealing and WheelingThat said, it's hard not to get a little carried away with this industry. Last week we suggested that Anderson was in play, contending that Anadarko Petroleum was interested. After all, who would have thought Devon was looking at another so close on the heels of announcing its deal to acquire Mitchell Energy? "Expanding our presence in Canada has been an important objective for Devon," Devon Chief Executive J. Larry Nichols said in a statement announcing the merger. "Anderson was at the top of our list of acquisition opportunities." Canadian oil and gas investors like the deal. "We are ecstatic," says Scott Walters, a trader at Toronto-based Research Capital, who sold his Anderson stake this morning. "$40 in this market is incredible. Anderson did well for its shareholders." Perhaps too well: The large premium and near-term dilution have some wondering if Devon overpaid. "They paid a big price," says Raymond James exploration and production analyst Wayne Andrews. He notes that Devon paid $1.23-$1.44 per thousand cubic feet of proven reserves. Other recent deals were priced around $1.20. "It also increases Devon's debt-to-market-cap above 50%, which could be an issue in a downturn," Andrews adds. Still, "Anderson's reserves are high quality, and their position in the Arctic is a real plus for Devon over time," says Andrews, who has a buy on Devon and a strong buy on Anderson. Raymond James hasn't banked for either company. "Short term, Devon's road could be somewhat bumpy."
Who's Next?Assuming there is an urge to merge among other energy companies, many will look to gas-rich Canada for options. "Rio Alto Exploration should receive some play here," says Walters. "Also Canadian Natural Resources and Canadian Hunter Exploration look interesting and, to a lesser extent, Talisman." Earlier this year my colleague Peter Eavis reported Rio Alto was being courted by Calpine. And there are a number of opportunities for synergies in the domestic natural gas market. "There is a list of probably 10, 15 or 20 names that are mentioned as possible takeovers," says Bryan Dutt, portfolio manager at Ironman Energy Capital and a member of the TSC Energy Roundtable. "Companies like Cross Timbers [which Dutt is long]. Burlington Resources is a large name that is often mentioned; Ocean Energy is a hot name of late; Louis Dreyfus Natural Gas is another." And while most analysts agree that additional combinations are likely, the recent slide in natural gas prices could slow the process. "I do think there could be a hiccup here in terms of the pace of consolidation because of the volatility in natural gas prices," says Adkins. "It is going to be harder to adjust models and determine price in the current environment."
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