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
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
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