The Daily Interview: A Time for Deal-Making in the Energy Sector?

With two major mergers in the energy industry this week, speculation grows on whether more deals are on the way.
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Earlier this week, Santa Fe International (SDC) - Get Report announced that it would buy Global Marine (GLM) for $3 billion in stock. That represented a 16% premium over Friday's closing price. On the heels of that deal, Devon Energy (DVN) - Get Report said that it agreed to purchase Canadian exploration and production company Anderson Exploration (AXN) for about $3.4 billion in cash. That deal represented a 50% premium. Are more deals in the energy sector on the way?

Scott Walters
Trader,
Research Capital

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Scott Walters, a trader at Toronto-based Research Capital, chatted with TheStreet.com about that possibility, in addition to share prices, oil and gas supply and other energy-related topics.

TSC: Why are we seeing a consolidation in the industry between Canadian and American companies?

Walters:

Canadian companies offer a compelling value to U.S. companies as targets, due to the cheap Canadian dollar and fairly cheap acquisition costs. But now Devon steps up to the plate and buys Anderson and pays a big premium in a very weak market. Americans are looking forward to seeing a much stronger gas market, and they have to replace the reserves. They're not having any luck finding it in the Gulf of Mexico, so they have to look north to Canada in the Mackenzie Delta Region and a lot of other frontier properties.

Anderson has a good asset base in Western Canada in the Mackenzie Delta Region, the Northwest Territories and the Yukon. Those are gas-rich areas that are relatively inexpensive to purchase, and by buying Anderson, Devon is getting expertise in that area, great land and good producing assets.

TSC: What is your opinion of the high premium Devon paid for Anderson in such a weak market?

Walters:

Anderson is really a crown jewel in Canada, and you have to pay top dollar for that.

TSC: Will this consolidation continue?

Walters:

We saw a two-month break, but judging from the

stock price action, the market expects to see more consolidation in this industry. The market took

Alberta Energy

(AOG)

up $3.65 Tuesday, and the stock is just barely off Wednesday. We saw a lot of U.S. buying in these names yesterday.

TSC: Are there any other companies that you think are prospective targets?

Walters:

Any well-managed Canadian oil and gas company is a target. You have to look at

Canadian Hunter

(HTR:Toronto),

Canadian Natural Resources

(CED)

and

PanCanadian Petroleum

(PCP:Toronto). These are all Canadian jewels: well-run companies with good asset quality and great management. At what price? I don't know.

Canadian Hunter's stock has been running two days in a row. People are afraid not to own these. They are afraid to miss the next takeover. But I don't know how long that is going to last.

TSC: What are some of the major issues at stake in Canada?

Walters:

The real issue is what's your thesis on gas and oil. ... People are still drilling for oil and gas. They still need to put it into the system. But we're going to see more pain in the sector short term because the takeover euphoria is going to pass.

It's a tradable rally, but the pain will come with the realization that gas is going to get hit hard. But at some point you have to suck it up and step in and buy because these companies offer quality assets.

TSC: How do you see this affecting share price?

Walters:

With natural gas at capacity earlier than anticipated, you could see a real decline in share price of 15% to 20% based off a collapse in commodity price short term. That's when you want to buy these.

TSC: When do you anticipate them falling to those levels?

Walters:

By November. If the commodity continues to collapse due to storage capacity, we will have a fantastic opportunity to see these names cheaper.

TSC: What do you think of the American Gas Association storage weekly number, which was just released?

Walters:

My initial reaction is that it's slightly better than expected, but it looks like gas storage will be full in front of the drawdown season. If the tanks are full before people start drawing them down, you will see people selling gas back into the market, and that's going to hurt the commodity price.