A glimmer of good news touched the junior oil and gas sector Tuesday in the form of a takeover offer. Sure, one transaction does not make a trend, but it is enough to rethink the fortunes of distressed energy companies.
Polar Star Canadian Oil and Gas Inc., indirectly owned by Teachers Insurance and Annuity Association of America, purchased TUSK Energy Corp (OTC:TSGYF) for $257-million. It may not seem like much, but it translates into a 150% premium compared to its closing price the previous day.
Cody Kwong, an analyst at First Energy Capital, said:
The TUSK transaction would appear promising for most of our distressed juniors that currently trade at a discount to these acquisition metrics, yet hold assets that would be attractive to numerous potential acquirers.
We do not envision distressed name having to fend off solvency issues in a mass panic, but instead selling/merging with a larger entity to help capitalized a solid asset position, ultimately providing a faster rebound for existing shareholders.
Apply the TUSK math to other junior exploration and production companies and then Crew Energy Inc. (OTCPK:CWEGF), Fairborne Energy Trust (OTCPK:FAIRF), Galleon Energy Inc. (OTC:GLNYF), Highpine Oil & Gas Ltd. (OTC:HPNOF), Iteration Energy Ltd. (OTC:ITXFF), Alberta Clipper Energy Inc., Angle Energy Inc., Arcan Resource Ltd., Monterey Exploration Ltd., Orsa Ventures Corp., Pegasus Oil & Gas Inc., Profound Energy Inc., Prospex Resources Ltd. (OTC:PSPXF), and Vero Energy Inc. (OTCPK:VREYF) “hold the most upside from current trading levels under this investment thesis,” Mr. Kwong said.
“We believe acquirers have already high-graded who they would want to bid on, so expect transactions to happen very shortly after reserves reports are available,” the analyst said.
But a word of caution from the Trading Desk: The TUSK math is for distressed juniors, which means, well, they are distressed.