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Ithaca Energy Seen Turning Korean With 70% Gain on North Sea Oil: Real M&A

Ithaca Energy Inc. (IAE)’s shareholders are poised to secure a 70 percent windfall by enticing companies from Korea National Oil Corp. to EnQuest Plc (ENQ) with the promise of the cheapest oil in the North Sea.

Shares of Ithaca, which received a non-binding takeover proposal in January, surged to a four-year high last week after saying it had been approached by more potential buyers. The Calgary-based company still traded yesterday at 5.45 times estimates for earnings next year, less than 97 percent of comparable explorers, according to data compiled by Bloomberg.

Ithaca is attracting interest as an embargo of Iranian oil and stronger global growth pushed Brent crude to its highest price in three years. Casimir Capital projects that Ithaca will boost North Sea output fivefold by 2013 and is worth C$3.75 a share as an independent company, which traded at C$2.20 before the January announcement. In a takeover, Korea National Oil, which expanded in the North Sea after acquiring Dana Petroleum Plc in 2010, and EnQuest, owner of a well with Ithaca, are among the most probable buyers, RBC Capital Markets said.

Potential acquirers can “buy a company that has done all the heavy lifting,” Irwin Michael, a Toronto-based money manager at ABC Funds, which oversees about $1 billion and owns Ithaca shares, said in a telephone interview. “It’s not easy operating in the North Sea. It doesn’t take very much to get a few aggressive acquirers coming in and saying, ‘We like that,’ and suddenly getting a bidding war.”

Today, Ithaca rose 2.6 percent to C$3.16 in Toronto.

Takeover Speculation

Philip Dennis, a spokesman for Ithaca, declined to comment beyond the company’s statement on March 1.

Ithaca’s board of directors said in the statement that it is in shareholders’ interest to enter discussions with all “bona fide interested parties.”

Incorporated in 2004, Ithaca explores for oil and gas at its 12 developments in the North Sea, which lies between the U.K., Norway and Denmark. Ithaca’s advance started on Jan. 20, when takeover speculation began to emerge. Ithaca said on Jan. 23 that it received a confidential, non-binding offer, helping it post the biggest two-day gain in three years.

The stock rose further last week, reaching its highest price since January 2008, after Ithaca said other potential bidders expressed interest in the exploration company.

At yesterday’s price of C$3.08 a share, Ithaca was valued at about 5.45 times analysts’ per-share earnings estimates for 2013, data compiled by Bloomberg show. That’s a discount of 55 percent to the median multiple for 169 oil and gas exploration companies with more than $500 million in market capitalization.

Strait of Hormuz

The valuation is underpinned by projections that Ithaca will earn about C$162 million ($162 million) in net income next year, three times the amount analysts had anticipated for 2011.

Kevin Shaw, a Calgary-based analyst at Casimir Capital, says Ithaca will produce 15,969 barrels of oil equivalent a day by the end of 2013, versus 3,102 barrels last year, according to a report dated Feb. 29.

Based on his estimates for the net asset value of the company’s proven and probable reserves and its debt-adjusted cash flow this year and next, Ithaca is worth C$3.75 a share, or C$972 million. That’s a 70 percent premium to its value before the takeover speculation and 22 percent higher than its price yesterday, data compiled by Bloomberg show.

Ithaca has become more attractive as a takeover candidate, according to ABC Funds’ Michael, as Iran threatened to block oil shipments through the Strait of Hormuz if its own exports are blocked. The strait is the transit route for about 20 percent of the world’s globally traded crude.

Iran Premium

Brent oil for April delivery, the European benchmark contract, on the London-based ICE Futures Europe exchange rose as high as $128.40 a barrel last week. On an intraday basis, it was the most expensive since July 2008.

Amrita Sen, a London-based analyst at Barclays Plc, said March 1 that the fuel may rise to a record $150 a barrel this year if political tensions stemming from Iran’s nuclear program increase. Oil demand growth in Asia is also rising faster than current prices indicate, leaving worldwide spare capacity “extremely thin,” according to Barclays.

“Quarterly averages of $140 per barrel or $150 per barrel are distinctly possible” in the second half, Sen wrote. “This is not our current base case, though it does seem to be moving closer to becoming reality.”

Global economic growth will accelerate to 4.5 percent in 2013 and then expand at faster rates in each of the next three years, according to forecasts from the Washington-based International Monetary Fund.

Potential Acquirers

Korea National Oil, South Korea’s state-run oil company, can acquire Ithaca to help achieve its overseas production target and expand further in the North Sea, according to James Hosie, an Edinburgh-based analyst at RBC.

South Korea, which imports almost all its oil and natural gas, plans to increase production at overseas fields to 35 percent of imported volumes by 2020, more than double the proportion last year. The energy developer, known as KNOC, plans to spend as much as $4 billion this year on buying overseas oil assets, Im Hong Geun, an executive vice president at the company, said in an interview in December.

EnQuest, which aims to boost production to more than 40,000 barrels of oil equivalent a day by 2014, and Abu Dhabi National Energy Co. (TAQA) could also acquire Ithaca, Hosie said.

Ithaca and EnQuest already work together in the North Sea, jointly owning an interest in the Crathes exploration well. Abu Dhabi National Energy, the state-run utility known as Taqa, last month bought 50 percent stakes in three oil and gas licenses in the area from Fairfield Energy Ltd.

Relative Value

“An acquirer like KNOC and Taqa and EnQuest is basically buying a self-funding add-on to their current business that gives them additional production growth in the near term,” Hosie said in a telephone interview. “An industry player at this point is going to place a higher value on the business than a player in the stock market would.”

Lee Za Kang, a spokesman for Anyang, South Korea-based Korea National Oil, declined to comment on whether it is interested in acquiring Ithaca. Conor McClafferty, a spokesman for London-based EnQuest, and Allan Virtanen of Taqa in Abu Dhabi said the companies don’t comment on market speculation.

Stephane Foucaud, a London-based analyst at FirstEnergy Capital Corp., said he doesn’t anticipate an offer higher than 209 pence, or C$3.29 a share, for the company’s London-traded stock. He used cash flow estimates for each of Ithaca’s assets, the cost of capital and tax losses.

Bidding Contest

The estimate is less than a 7 percent premium to Ithaca’s current price, which has already more than doubled from a low of C$1.49 a share in October, data compiled by Bloomberg show.

“We don’t see that much potential for the buyer to pay a big premium,” Foucaud said in a telephone interview. “The acquisition premium is already worked in the share price.”

Having multiple parties interested in acquiring Ithaca increases the chance that shareholders will get a higher price, according to ABC Funds’ Michael.

“In many cases, the stock market is not giving full value to a lot of the work” that oil companies such as Ithaca are doing, he said. “Hopefully you get a bit of a bidding war.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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