NatGas takeover premiums

Tristone Capital and analyst Don Rawson put out a most intriguing report today called “Clean-up on Aisle 4” as they look at the prospect for takeover premiums in the Junior E&P Market. What has piqued their interest is the recent transactions in the M&A Market such as Polar Star’s acquisition of Tusk Energy, Zargon Energy’s acquisition of Masters Energy, Penn West Energy’s acquisition of Reece Energy and NAL Oil and Gas’s acquisition of Alberta Clipper.

They point out that the average transaction metrics was approximately $41,000 boe/d for production and $12/boe for P+P reserves, significantly higher they note than the typical trading metrics for the junior sector today.

Their interest is tweaked as they say, “ We believe there is an opportunity for strong returns for value investors investing in a basket of these names. We see transaction premiums of 25-75% above the current market possible for those companies that do sell, most likely in paper-to-paper deals.”

Interesting they add this worrisome comment, “For those that do not, we see the potential for drifting sideways or down over the next two quarters in the absence of a commodity induced rally. We anticipate an even more challenging gas price environment in the summer as gas storage builds into the fall.”

The ten companies they key on are, Berens Energy, Canext Energy, Crocotta Energy, Ember Resources, Profound Energy, ProspEx Resources, Rock Energy, Sabre-tooth Energy, Twin Butte Energy and West Energy, but they point out that two mid-cap names—Compton Petroleum and Iteration Energy “also fit the profile of undervalued companies that face strong headwinds, but could receive significant takeover premiums in a sale.”

They point out that potential buyers would be looking for the same thing—focused, high net back production, long reserve life, low risk development drilling inventory, operated high working interest production and control of supporting infrastructure.

The report point out, “We do not think it makes sense for these companies to sell for cash at a time when commodities are depressed, but we do believe it makes sense for them to sell for shares of bigger, better capitalized companies that will participate in a rally when commodity prices improve…”

As far as why would some of the bigger trusts or bigger companies want to buy these juniors? They write, “With valuations depressed, it is much cheaper to buy reserves than drill them.”


a blogger has further math on ember
(of course any valuation requires financial survival first, and with so much debt ...)