A steep decline in share prices, week commodity prices and tight credit markets provide the perfect conditions for consolidation in the junior oil and gas sector, says Scotia Capital analyts George Toriola. He points out in a recent research note that several junior oil land gas companies have seen share price declines of 70%, while the TSX S&P energy index has dropped 50% since the beginning of the the third quarter.
Mr. Toriola says in a note to clients:
We believe recent market activity probably accentuates the cost of capital differences between oil and gas companies. In our opinion, companies with a cost of capital advantage probably emerge as consolidators.
In particular, Mr. Toriola believes NuVista Energy Ltd. (OTC:NUVSF) and Iteration Energy Ltd. (OTC:ITXFF) emerge as the aquisitors, while Rock Energy Inc. [TSX:RE] appears to be a potential takeover target.
Mr. Toriola points out that in the current market conditions, using equity capital to finance any acquisition “is very unattractive to companies right now given the excessive shareholder dilution this would entail.” As well, access to equity capital is premised on investor demand, which is a big asssumption in this environment.
As for using debt capital to finance acquistions, that is “dependent on company performance,” Mr. Toriola says, and current comomodity prices and tight credit markets "may make this a challenging option."