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Oil and Gas Sector takeover activity is running hot16.06.2014

SMALL CAP OIL AND GAS COMPANIES ARE TAKEOVER TARGETS
Small cap listed Oil and gas companies look to be increasingly on the chopping block as bigger predators eye takeover opportunities to boost production growth given higher operating costs, a relatively high oil price and increasing domestic gas prices.

KAROON GAS AUSTRALIA
This was certainly the case for Karoon Gas Australia, whose shares spiked 46 per cent in early June from $2.54 where it was in late April prior to its suspension of trading due to funding uncertainty. It got to as high as $3.72 after Origin Energy lifted the previously cash strapped oil and gas minnow out of the grave, and certainly out of its suspension of trading (they’re now trading at $3.39).

Origin is on the hook to buy Karoon’s 40 per cent interest in two exploration permits for potentially large offshore gas fields in Western Australia’s Browse Basin.  The deal delivers Karoon US$600 million (A$647m) upfront and payments of up to US$200 million if things go well for Origin.

OTHER OIL AND GAS TAKEOVERS
The transaction comes in the wake of other merger and acquisition activity in the sector, including the Horizon Oil (HZN) and Roc Oil (ROC) merger, the all script takeover by Drill Search for Ambassador Oil and Gas (AQO) and the $1.84 billion takeover of US based unconventional oil producer Aurora Oil and Gas by Canada’s Baytex Energy.

JOHAN HEDSTROM FROM CANACCORD GENUITY
We spoke to Canaccord Genuity’s oil and gas analyst Johan Hedstrom to find out why there is more M&A activity in the sector in comparison to others. He said:

“There is more takeover activity in oil and gas because the share prices have fallen, yet the oil price is US$100 plus and gas prices in Australia are rising. This is unlike other commodities like iron ore, copper and gold, which have been under sustained pressure.”

AUSTRALIAN OIL AND GAS IS HARD TO FIND
Another factor is the increasing cost of finding oil and gas and of producing liquefied natural gas (LNG) in Australia. The world is finding more gas and the recent Russian deal to sell gas to China is one example of the competition with Australia.  Increasing amount of shale gas is also coming out of the US and China.

BIG COMPANIES NEED CHEAP ASSETS AND SMALL COMPANIES NEED SCALE
Hedstrom predicts that there will be more activity in the sector as big companies go looking for cheap assets, and small companies look for scale:

“There is going to be speculation about more activity because so many companies’ prices have become irrelevant for investors. Mergers produce scale which will attract institutions.

“With share prices falling while the oil price is hanging in there, and Australian gas prices are going up, it looks like there are opportunities in the sector.”

Hedstrom says that candidates on the takeover front include those at both the big and the small end. Of the former, he numbers Beach Energy (BPT), Drillsearch Energy (DLS) and Senex Energy (SXY) because of their shale gas enterprises in the Cooper Basin.

At the smaller end he includes Cooper Energy (COE) as well as unconventional oil and gas producers with operations in the US, namely Sundance Energy (SEA) and Lonestar Resources (LNR) – all companies which have been tipped by Under the Radar Report.

He also singles out Karoon (KAR). “This is a huge deal for the company and means it can develop its assets in Peru and Brazil, where the World Cup is. Maybe it can score some goals out there?”

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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