Repsol’s Cash Puts Athabasca to Kodiak in Reach: Real M&A

Repsol SA (REP), armed with as much as $13 billion in firepower for acquisitions, may strike liquid gold by going after fast-growing oil producers from Athabasca Oil Corp. to Diamondback Energy Inc.

Asset sales and a $5 billion settlement with Argentina this year have added to Repsol’s cash, giving Spain’s biggest energy company more money to fund deals. Chief Financial Officer Miguel Martinez said this month that the $37 billion company is looking for takeover targets that offer a “growth platform” and are based in more stable countries after its biggest purchase so far, a more than $15 billion deal for YPF SA, ended with a government seizure.

Repsol could target an oil sands producer such as $2.7 billion Athabasca, said Tudor, Pickering, Holt & Co., while Banco Santander SA said it may eye some of BG Group Plc’s assets in Canada. Diamondback, a $3.7 billion company whose wells in the U.S.’s oil-rich Permian Basin will help it more than triple revenue over the next two years, is another option, according to Morningstar Inc. Should Repsol choose to enter the more established Bakken formation, $3.4 billion Kodiak Oil & Gas Corp. (KOG) controls some of the region’s most attractive acreage, said ITG Investment Research.

Photographer: Walter Moreno/Bloomberg

The YPF SA refinery stands in Lujan de Cuyo, Argentina. Argentine President Cristina Fernandez de Kirchner took control of 51 percent of Repsol’s YPF unit in 2012, alleging it had been mismanaged. Repsol said this month that it had received a $5 billion bond compensation package from the Argentina government, ending a two-year dispute over the seizure. Close

The YPF SA refinery stands in Lujan de Cuyo, Argentina. Argentine President Cristina... Read More

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Photographer: Walter Moreno/Bloomberg

The YPF SA refinery stands in Lujan de Cuyo, Argentina. Argentine President Cristina Fernandez de Kirchner took control of 51 percent of Repsol’s YPF unit in 2012, alleging it had been mismanaged. Repsol said this month that it had received a $5 billion bond compensation package from the Argentina government, ending a two-year dispute over the seizure.

“Repsol needs to reload,” Jason Kenney, an analyst at Banco Santander in Edinburgh, said in a phone interview. “In a multi-decade approach, you need to be in new basins and new exploration horizons and new geological kind of trends, and that’s probably where they’re going to try to focus.”

Valuation Challenge

The challenge will be securing a deal at a reasonable valuation in an acquisition environment that’s “quite competitive,” he said.

“Repsol continues to look for assets” in countries in the Organization for Economic Cooperation and Development, spokesman Kristian Rix said.

Argentine President Cristina Fernandez de Kirchner took control of 51 percent of Repsol’s YPF unit in 2012, alleging it had been mismanaged. Repsol said this month that it had received a $5 billion bond compensation package from the Argentina government, ending a two-year dispute over the seizure. That compares with the more than $10 billion Repsol initially sought.

“They haven’t got what they wanted to get out of it, but they’ve got a decent price and they’ve got it now,” Anish Kapadia, a London-based analyst at Tudor, said in a phone interview. “If they went through the courts, they might be waiting five years plus.”

Most of the bonds have since been sold to JPMorgan Chase & Co. Proceeds from that and Repsol’s $1.3 billion sale of almost all of its remaining YPF stake are adding to the $7.1 billion in cash and equivalents it held at the end of March.

$10 Billion

The company’s reserves have fallen the last few years after the seizure of YPF. Repsol also sold liquefied natural gas assets to Royal Dutch Shell Plc in January to bolster its finances.

“We need somehow to rebuild the P&L of the company and this will imply acquisitions or one or several acquisitions, and we are looking for companies or assets,” Martinez, Repsol’s CFO, said during the earnings call this month.

Repsol has said it may spend as much as $10 billion on deals, and any acquisition would probably be in the U.S., Canada or other developed markets, such as northern Europe.

North America

The oil producer’s chances of finding an accretive deal in North America may be best in Canada, said Kapadia of Tudor, with an oil sands producer such as Athabasca (ATH) as one potential candidate. Buying that company wouldn’t “be a stretch at all” for Repsol with its cash infusion, he said.

“I’m not confirming or denying any names or parties who potentially would look at us,” Matt Taylor, vice president of capital markets and communications at Athabasca, said in a phone interview. “We’ve got a big foothold in the Duvernay play, so from that standpoint, I’m sure we would screen well for international companies looking for exposure to Canada.”

Analysts project Athabasca’s revenue will climb 63 percent in the next two years, according to data compiled by Bloomberg.

In the U.S., Repsol may find growth opportunities with limited exploration risk, said Allen Good of Morningstar. Production in the country has soared as the combination of horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies trapped in shale-rock formations such as the Permian Basin in Texas and the Bakken in North Dakota.

Diamondback Acres

Diamondback (FANG) Energy has about 70,000 net acres in the Permian Basin. The total area, estimated to be valued at as much as $5 trillion, is still being developed and oil companies’ ability to tap resources at varying depths from a single well means “you could get more for your money” in an acquisition, Good said.

Analysts estimate Diamondback’s revenue will jump to almost $700 million in 2015 from $208 million last year.

The company is “one of your smaller Permian players who has a lot of acreage and a lot of running room,” Good said in a phone interview. For Repsol, “certainly even picking up a smaller cap like that would work” to build a foothold there.

If Repsol instead sets its sights on the Bakken shale formation in the Williston Basin, Kodiak and $5.1 billion Oasis Petroleum Inc. (OAS) would be takeover options, said Gibson Scott, director of energy research at ITG.

The Bakken, combined with the Three Forks and Sanish formations, could become one of the largest oil-producing regions in the next 30 years. It’s attractive to large oil producers because the resource potential has mostly been demonstrated already, Scott said.

“The top of the list for a super major would be resource,” Scott said in a phone interview. “There are some bite-size names, like Oasis, like Kodiak, that have good acreage positions.”

Billionaire hedge-fund manager John Paulson highlighted Kodiak as a potential target last year.

Asset Deals

If Repsol targets asset deals instead, it could look to the North Sea, off the coasts of the U.K. and Norway. The area is “more of a buyer’s market at the moment” because of the number of interested sellers, Kapadia of Tudor said.

Among those looking to exit the area are Marathon Oil Corp. and Talisman Energy Inc. (TLM), whose assets are possibilities for Repsol, Kapadia said. Repsol could also consider some of BG Group’s assets in Canada, according to Kenney of Santander.

Sacred Cows

BG Group Executive Chairman Andrew Gould has said there would be “no sacred cows” as the oil producer considers selling assets to boost shareholder returns. Chief Executive Officer Chris Finlayson’s unexpected resignation in April prompted speculation the $73 billion company could become a takeover target.

Representatives for Calgary-based Talisman and Reading, England-based BG declined to comment. Representatives for Kodiak, Diamondback and Oasis didn’t respond to requests for comment.

Lee Warren of Marathon Oil declined to comment beyond statements made in the Houston-based company’s earnings release this month. Marathon Oil said marketing of its North Sea businesses is on schedule and bids are due in the second quarter.

Repsol risks overspending on acquisitions, said Kenney at Santander. Exploration and production deals announced this quarter have fetched an average premium of 48 percent, the highest in five years, according to data compiled by Bloomberg.

“It’s going to take a lot of effort and if they can find value in either an asset package or a certain position, then other people can probably also find value in it,” Kenney said.

Repsol investors will likely have one thing on their minds though.

“The main question is what to do now with the cash?” said Peter Oppitzhauser, head of oil and gas research at Kepler Cheuvreux in Zurich said in a phone interview. “What to do with $10 billion?”

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling

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