NEW YORK (TheStreet) -- Shale Mania is back, and for some analysts, this means there are as many natural gas stocks to short on the euphoria as there are to be taken out by acquirers writing big premium checks.
Analysts say there may be plenty of irrational exuberance in natural gas sector as a result of the above-60% premium that BHP Billiton(BHP) is paying forPetrohawk(HK), a contrarian view based on the idea that the Petrohawk deal was more about Petrohawk than industry consolidation.
As natural gas prices remain low, and both buyers and sellers take their sweet time before jumping into a deal traders may be taking quick profits in stocks like Range Resources and Southwestern Energy, which surged on the Petrohawk deal.
"I wouldn't be surprised to see a few deals, but with the healthy degree of appreciation in stocks like Range Resources(RRC), Southwestern Energy(SWN)and Comstock Resources(CRK), it's hard to believe all the names maintain gains for any longer than a week to a month," said Curtis Trimble, analyst at MKM Partners.
Other energy analysts agreed that it wouldn't be a surprise to see Range Resources, which rose 12% on Friday, and Southwestern Energy, up 9%, to give back some of those gains. They are not heavily shorted stocks, but short covering may have been embedded in the action on Friday also. Range Resources short interest equals about 9% of its float, according to Nasdaq. Analysts also noted that both companies are natural gas-heavy in their portfolios, whereas Petrohawk had made a significant transition to oil through the Eagle Ford shale.
"Southwestern and Range will be natural gas-heavy forever," said MKM Partners' Trimble. That said, their portfolios do represents some of the best plays in the shale space, between the Fayetteville and Marcellus shale, and are multi-basin portfolios, which is a requirement for the big checks from big buyers.
Unless there is a big spike in the price of the underlying commodity, analysts question whether the management teams of these companies will be motivated to sell sooner rather than later.
"Financial buyers like private equity will buy assets, not companies, and the integrated companies will do about one a quarter, as we've already seen. Unless there is some fundamental sign that natural gas is about to spike, people have time to wait and get more value from their assets," Trimble said. He sees Ultra Petroleum, up 5% compared to twice that gain in Range and Southwestern, as much more likely to be interested in selling sooner rather than later.
Pioneer Natural Resources(PXD)and Brigham Exploration(BEXP), up more than 10% and 8% respectively on Friday, were two more companies on the takeover list that the analysts said may not be acquired any time soon.
Nevertheless, there were a few compelling premium arguments to be made based on the Petrohawk deal. Even though Petrohawk had made a big transition to liquids through the Eagle Ford, it was still 88% natural gas in its portfolio, according to MKM Partners. Petrohawk also had a much bigger debt load than other companies in the space. BHP Billiton is assuming $3 billion in debt so Petrohawk receiving a 65% premium with a debt load like that makes companies without comparable debt like Range look attractive. Petrohawk, though, traded at a lower multiple than most of the companies in its peer group before the deal.
There were several aspects of the BHP-Petrohawk deal that argue against a quick consolidation in the space:
- There was a very motivated buyer with a valuation trailing its peer group actively trying to sell the company for years
- There was a buyer as motivated as the seller after being spurned by Potash and Rio Tinto in recent years. BHP Billiton is also a prolific buyer of assets, and there are only a handful of those companies.
- The quality of Petrohawk's asset base growth isn't reflected across the industry, and it had done a good job of not only adding attractive shale acreage but selling off less prime real estate
Analysts disagreed with the idea that companies need to move fast before the opportunity ends. Interest rates are low and commodity prices high, but, "There's no such thing as me-too in this space. Me-too is a difficult concept because these big buyers move like the Titanic," said MKM's Trimble.
Over an 18-month period major European oil companies like Statoil and Total will make a larger push into the shale, but that activity doesn't conflate to a rapid consolidation of the sector and lasting revaluation of companies.
Add to this the lack of proven production history in most of the shale plays outside of the Haynesville, and there are plenty of companies in today's rally that won't ever be acquired. As the wheat is separated from the chaff, so to speak, Imperial Capital analyst Mike Jones expects deals like Petrohawk-BHP to be a bearish indicator for the majority of E&P companies who won't be attractive to the big buyers and may be left without an exit strategy as the better properties in the sector are consolidated. "You don't want to be the last one left holding the bag," wrote BMO Capital Markets analyst Dan McSpirit on Friday in an analysis of the Petrohawk bid and the implications for the independent E&P companies.
For example, two energy companies that surged on their acreage in the Eagle Ford don't have the profile of Petrohawk. Swift Energy(SFY)and SM Energy(SM) were both up more than 8% on Friday. SM Energy has 250,000 net acres in the Eagle Ford, while Swift has 79,000 net acres. Petrohawk had 305,000 net acres in the Eagle Ford in addition to its other shale plays.
"These companies fail the test of operating leverage in several basins," said Imperial Capital's Jones, and he added Goodrich Petroleum(GDP) to this list.
"It would be difficult to argue that the acreage many companies bring to the table will move the bar for big buyers," MKM's Trimble added.
The best assets in the Eagle Ford have arguably already been picked over through joint ventures. Trimble said that SM Energy's acreage has been a source of concern for investors based on the belief that areas outside of its existing joint venture acreage may not be as attractive.
Analysts argued that Comstock Resources was the classic example of a single basin play that runs up on industry takeout speculation, but may not be on the radar of the biggest buyers. Comstock shares were up more than 8% on Friday.
"What we saw today is what we saw after the Exxon Mobil-XTO deal, with a massive upward revaluation of these companies...I would be looking to short some names," said Mike Jones, analyst at Imperial Capital.
-- Written by Eric Rosenbaum from New York.