Investors may be shying away but the recent sell-off in junior oil and gas companies has surely got the attention of larger players looking to make acquisitions. Tighter lending practices at banks could also push some debt-levered firms into a sale.
At these prices, Scotia Capital analyst Peter Doig expects to see more consolidation activity in the oil and gas sector. He highlighted Galleon Energy Inc. (GLNYF.PK) and TriStar Oil & Gas Ltd. (TOGSF.PK) as both his top long-term picks and M&A targets, noting that they fit the bill for larger producers looking to acquire assets in the hot Montney and Bakken plays.
While most of the juniors are trading well below net asset value [NAV], Mr. Doig does not expect buyers will pay up to the full value of the risked upside. Instead, he sees them paying somewhere between the core NAV and the risked upside.
Based on where both stocks are currently trading, he said the market appears to be discounting WTI oil around $70 per barrel and AECO natural gas at C$6.25 per thousand cubic feet [mcf].
He ran both through three oil and gas price scenarios. These produced per units values in the range of around C$15 to the mid-C$20s for TriStar and around C$11 to the high-teens for Galleon.