Norway's largest oil company, Statoil ASA (NYSE:STO), made headlines recently with its proposed all-cash $4.4B buyout of Brigham (BEXP), an Austin-based independent energy exploration and development producer. The takeover was unanimously approved by the board of Brigham - an action that was then immediately challenged by Wolf Haldenstein as a potential breach of fiduciary duty. Wolf Haldenstein is suggesting that the firm did not adequately auction itself - a claim that, in my view, will be deleterious to shareholder value if it proves to hold any ground. The reality is that Brigham has a few lucrative plays, but currently lacks the necessary capital for full development as it is an undersized producer. Selling itself to a major firm will help both parties expand capacity and properly diversify risk geographically.
Not enough can be stressed about the issue of time. As the market's response to the Kinder Morgan (NYSE:KMI) buyout of El Paso (EP) indicates, quicker is often better in this industry. As an historical example, consider the founding of Standard Oil. Rockefeller was willing to eat up smaller competitors with the understanding that scale is key in energy - that the synergistic value unlocked through combinations far outweigh the shortcomings of any one particular acquisition. Knowing this, often times, managements of large oil and gas producers purchase smaller firms above the intrinsic value. In fact, the motto of Chesapeake Energy's (NYSE:CHK) billionaire CEO, Aubrey McClendon, is "let us overpay". So, it may very well be the same for Kinder Morgan and Statoil.
And on the competitive side, it is my belief that Brigham will struggle if it fails to increase scale now. I have made bullish projections on El Paso (see here) and Chesapeake Energy (see here); Brigham needs to speed up exploration if it wants to compete.
As for the takeover itself, it came at a 20% premium to the closing October 14 price, which I find more than fair given that El Paso's offer was at a 37% premium with cash and stock. Note that El Paso produces more than twenty seven times the revenue that Brigham produces and thus merits a higher relative tender offer. The $36.50/share that Brigham shareholders are being offered will commence around October 31st this year.
Before the tender offer was made, Brigham received a "strong buy" rating on the Street. It nevertheless trades at 51x and 16.1x past and forward earnings, respectively, thus making it one of the more expensive energy stocks. Statoil trades at 6.5x and 8.1x past and forward earnings while offering an attractive dividend yield of 4.74%. My recommendation is that investors long Statoil shares when the merger is completed to benefit from favorable risk/reward and the access to diverse geographical plays.
Brigham has become focused on the North Dakota and Montana regions, while exploring and developing the following areas: Onshore Gulf Coast, West Texas, Anadarko Basin, Bakken, Red River, and the Three Forks, among others. Catalysts include the Williston Basin, which has exceed expectations with production of 14K Boe/d in July, improved margins, and the de-risking of inventory. Management also raised guidance to around 15K - 16.2K Boe/d September production - a 36% sequential growth improvement. Another catalyst is Three Forks, where the Irgens 27-34-2H in Williams County has yielded a daily peak rate of 2,906 Boe/d in 32 frac stages. Improvements are also being realized in the backlog and management believes it may find up to 500 more drilling sites.
Towards this end, Statoil will provide Brigham increased capital and technology to better explore and develop sites. The integrated Norwegian energy company will also de-risk Brigham, as it has proven reserves of over 2,174M barrels and 5,408M barrels of oil equivalents. Approximately 68% of the business is strategically upstream with the Avaldsnes and Aldous developments ranking among the top 5 biggest volume discoveries. The firm's production target is 2.5 mmboe per day and it remains well on its way to succeeding as a volume leader.
In conclusion, while I am bullish on both of the stocks separately, I find that together, the revenue and cost synergies will result in a leading company that is even more attractive from an investment perspective. Increasing scale and acquisitions is perhaps the single most important strategy in the industry - and as other competitors size up, Brigham shareholders just cannot afford to wait.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.