Oil prices have bounced back to around US$40 per barrel compared to the technical-inspired lows seen in April this year.
As a result, E&Ps (explorers and producers) are slowly shifting their mindset from survival to growth and, for cash-rich companies, the opportunity set is increasing, according to Peel Hunt.
The broker has been assessing the possibility of a wave of takeovers in the mid-cap oil and gas sector following the recovery in crude.
M&A has typically been well received by the market in recent years, it said, and a merger is s an attractive way for these E&Ps to grow inorganically.
Energean Oil PLC (LON:ENOG) struck a deal last year with Italian firm Edison to acquire a range of producing and development assets for US$750mln.
Part of that deal has been amended to exclude Algeria while a sell-on of Edison’s North Sea assets looks to have fallen through, but the bulk of agreement is set to complete before the year-end.
Peel Hunt has split the rest of the companies into potential acquirers and acquirees.
The company has added the most value through shrewd acquisitions leading to a 18-fold rise in share value over this period.
This has been achieved without raising any new equity, adds the broker.
“Going forward, we anticipate Serica will be actively looking to acquire additional assets in the North Sea and continue its measured approach to achieving growth via astute acquisitions.”
At 108.4p, Serica is valued at £281mln.
“We value Montara and Stag at US$400mln vs a price paid of US$113mln.
“Despite the recent Lemang announcement, we believe Jadestone has the balance sheet, ambition and shareholder support for another acquisition in 2020/21.”
Cairn Energy PLC (LON;CNE) has a history of pursuing selective M&A at opportune moments to deliver growth, Peel Hunt noted, such as selling out of India and the Nautical Petroleum and Agora Oil & Gas acquisitions.
“Today, it is a solid production and development-focused E&P with a healthy balance sheet and an opportunity to acquire at the cyclical low point,” said Peel Hunt.
Its aim is to acquire an onshore, low-cost production asset, according to Peel Hunt.
SDX Energy PLC (LON:SDX) has had an excellent 12 months with 9/12 wells successful in the recent E&A drilling campaign.
The flagship-operated S. Disouq field reached plateau ahead of expectations and is benefiting from a 35% increase in 2P reserves, and Moroccan gas demand recovering quicker than expected.
However, while the company is performing very well operationally, the stock’s low market cap (£35m) and liquidity make it more challenging for institutions to invest.
This is well recognised by SDX’s management, the broker said, who are looking to execute well priced onshore acquisitions of producing assets in the MENA area.
Africa Oil (LON:0QVL) is not as cash-rich as some other E&Ps following this year’s US$520m acquisition of c30Mboe/d non-operated production offshore Nigeria.
However, chief executive Keith Hill has said he wants to double group production and this will most likely be outside Nigeria to diversify country risk.
Acquirees/ merger candidates
Peel Hunt has highlighted Pharos Energy/Transglobe Energy and Gulf Keystone Petroleum/Genel Energy as two possible mergers within the sector.
A Gulf Keystone Petroleum Ltd (LON:GKP)/ Genel Energy PLC (LON:GENL) combination would also create scale, improve liquidity and make the combined entity more investable than each on a standalone basis.
Peel Hunt concludes while there is unlikely to be a huge surge in M&A activity the access to equity growth capital for the majority of the 100 London-listed E&Ps continues to be constrained by virtue of their small size and lack of liquidity.
Typically, in order to generate the capital growth required Peel Hunt says they need:
- First-rate management with a proven track-record (the most important factor for us).
- Good quality assets with a production bias.
- A healthy balance sheet.
“Having all three is clearly the ideal scenario and will maximise the chance of success, but companies with a combination of any two may also provide interesting opportunities if they can attract the third.
"In our view, in order to improve the ‘investability’ of the E&P sector in London, some asset-level and corporate consolidation is required.
"This would create a smaller number of larger, more liquid companies with portfolios that have scale; characteristics that are more appealing to investors."