Natural gas has become the go-to source for lower-cost, lower-pollutant energy in the United States and abroad. It plays a more important role in energy consumption globally not only as we try to reduce oil dependence, but as advancing technology allows us to tap unconventional gas resources. Shale gas, coalbed methane, tight, and deep gas provide resources that are only beginning to be tapped as primary energy sources. Obviously the term "shale" has become a hot-button issue in North America, but the opportunity that exists in a resource yet to be fully explored, let alone implemented, is vast. I took this week to look into a few E&P companies participating in unconventional natural gas that I believe make for interesting acquisition targets.
Last August, BHP Billiton (BHP) acquired Petrohawk Energy Corporation for $12.1B, paying $38.75 per share, roughly 60% over the previous 20-day average. Until its acquisition Petrohawk was actively producing and exploring shale gas on over a million net acres in Louisiana and Texas. The industry uses independent firms to explore and quantify gas reserves, measured in cubic feet (Tcf, Bcf, MMcf...etc), and calls the analyzed data "proven reserves." Independent analysis found that the acreage held 3.4 proven trillion cubic feet of gas (liquid as well). BHP previously paid $4.75B in March of 2011 to acquire 487,000 net acres of shale from Chesapeake Energy (CHK) that held 2.4Tcf proven gas reserves. Shale gas purchases are on the rise. At the time, Bloomberg reported that, "shale gas properties in the Eagle Ford area of Texas, where some of the Petrohawk assets are located, accounted for 20 percent of energy deals in the second-quarter [of 2011]."
Cove Energy PLC (OTC:CNVGF) of the U.K. currently explores deep water liquid gas reserves off the eastern coast of Africa. The company owns 8.5% of the Rovuma gas field east of Mozambique's coastline, along with major players such as Anadarko Petroleum (APC) and Exxon Mobil (XOM). Cove and partners estimate 12Tcf of gas reserves in their collaborative area. Most important though are the two tender offers that Cove recently entertained. Royal Dutch Shell (RDS.A), colloquially "Shell", offered 220 pence per share outstanding in May, while PTT Exploration and Production (OTC:PEXNY) offered 240 pence per share to purchase Cove in its entirety. Shell, which still hopes to enter the liquid natural gas play in the region, walked away from the deal this week, allowing PTT to purchase Cove at $1.9B, a bargain in the industry and one that took analysts and investors by surprise. Shares of Cove, which trades primarily on the London Stock Exchange, traded at a 14% premium to the sale price in the week leading up to the agreement.
I decided to jump into a natural gas play. Far East Energy Corporation (OTC:FEEC) is a natural gas exploration and production company operating in China. Yes - China - where coal has been a staple of energy production and consumption for decades. The country is finally making attempts to move from the pollutant resource towards alternatives - natural gas lent itself as the perfect opportunity. The People's Republic pledged to increase natural gas as a portion of energy use from 4% to 10% by 2020 and has plans to double or triple spending on their natural gas infrastructure in the same period. Far East operates on net acres of roughly 1.1MM in the Yunnan and Shanxi Provinces; the company estimates between 21.9Tcf and 29.2Tcf of gas reserves in their three production blocks, shared with the China Union Coalbed Methane (CUCBM). Most unique, however, is the company's ability to work in tandem with CUCBM, the two alone on a space that in the U.S. would be mined by 20-40 companies.
While gas reserves have yet to be proven, estimates have been provided by independent outside sources and the geology of the region's coalbeds compare favorably to the San Juan and Black Warrior basins in the U.S, two of the largest producing domestic gas reserves. As larger companies get involved in unconventional gas plays, FEEC makes for an obvious acquisition target. The company's current liabilities may be a concern (more than double current assets) but the July 9th MofCom approval - the last major hurdle in continued exploration - represented a milestone for FEEC, allowing full access to the rest of a $25mm loan through Standard Chartered Bank.
For a company with a market cap of less than $1B and gas reserves estimated to be some of the largest on the globe, a tender offer sooner than later makes sense. An acquisition price of even $1B would offer more than 10x returns on the current share price ($0.24) and after an examination of recent tender offers, $1B for 20 Tcf in reserves is exceptionally conservative. Companies like Shell and ConocoPhillips (COP) are looking to make acquisitions in a blossoming industry that may quickly prove too expensive - read lucrative - to enter.
Disclosure: I am long OTC:FEEC.