Oil and Gas Consolidation: Rating the Takeover Targets

by: Streetwise Blog

By Andrew Willis

The current boom in oil patch takeovers is easy to explain.

There are a number of junior and intermediate energy plays that promise to kick off strong cash flows, yet these companies are trading at relatively low valuations, by any historic measure. When senior energy companies see the opportunity to buy reserves on the cheap, you get acquisitions.

The fun comes in trying to guess who gets taken out next. On that front, investment dealer Peters & Co. took a look at valuations on Wednesday and highlighted the most attractive targets.

In the wake of friendly bids for Breaker Energy (OTC:BKRYF) and Highpine Oil & Gas (OTC:HPNOF) - each of which is being bought by a large trust - Peters & Co. analysts screened domestic junior and intermediate companies on a number of criteria.

Let’s start with what the analysts found, then take a quick look at the dealer’s methodology.

“NuVista Energy (OTC:NUVSF), Peyto Energy Trust (OTCPK:PEYUF), Twin Butte Energy (OTC:TBTEF) and Yoho Resources stand out as being relatively inexpensive with their respective peer groups,” said the Peters & Co. report.

Among junior oil and gas plays, Peters & Co. also singled out Ember Resources (OTC:EBRRF), Interation Energy and Zargon Energy Trust (OTCPK:ZARFF) showed up as relatively cheap.

What lies behind these figures? Among other screens, the analysts compared the oil and gas companies they cover by contrasting the enterprise value of company to its forecast cash flow. In the report, the firm said: “Clearly, from an acquirer’s viewpoint, desirable entities posses above average cash glow generating capabilities and below average current valuation levels.”

At the other end of this scale, Crescent Point (CPGCF.PK), NAL and PetroBakken emerged with the highest valuations, which makes these companies likely buyers in a consolidating sector.