NuVista Proves Most Tempting Target in Energy Industry

NuVista Energy Ltd.’s decision to slim down to focus on its natural-gas resources in Alberta is turning the oil and gas explorer into one of the industry’s most tempting takeover targets.

After divesting assets to help pay down debt, the Calgary-based company’s enterprise value will be about 36 times its post-sale daily production, or lower than 94 percent of peers, according to data compiled by Bloomberg. The C$456 million ($467 million) company agreed to the transactions after its shares dropped 68 percent since February 2010.

NuVista’s reorganization around its Wapiti project makes the company a more likely takeover candidate, according to UBS AG. FirstEnergy Capital Corp. and Salman Partners Inc. say it may draw interest from China Petrochemical Corp., the state-run energy producer known as Sinopec that bought property near NuVista’s Wapiti site in Canada last year.

“They just streamlined their asset base,” Matt Donohue, a Calgary-based analyst at UBS, said in a telephone interview. “It does position the company to eventually get something done, which I think is the end game.”

“Company policy is that we do not comment on speculation,” NuVista Chief Executive Officer Jonathan Wright said in a statement. A spokesman for Sinopec declined to comment on whether the company is interested in NuVista.

‘Capitally Intensive’

NuVista, created in 2003 when Bonavista Petroleum Ltd. divided in two, said this week that it’s raising about C$236 million by selling properties, an amount equal to more than half its market capitalization at the time. Doing so will reduce net debt to C$108 million from C$339 million, giving NuVista more financial freedom to accelerate development of the Wapiti natural-gas project, according to the company. Building out that site is “capitally intensive,” Brian Kristjansen, an analyst at Canaccord Financial Inc., wrote in a Sept. 11 report.

Following the sales, NuVista’s production will be reduced to 16,200 barrels of oil equivalent per day, the company said Sept. 10. Factoring in the proceeds from those divestitures, NuVista’s equity and net debt will be valued at about 35.7 times that rate.

That multiple is less than almost all of the 142 other energy explorers and producers in North America with market values bigger than $250 million, data compiled by Bloomberg show. Companies in the group trade at a median ratio of about 84 times production.

‘Unfair Discount’

“Believing that NuVista is creating enough liquidity to show some solid growth over the next two years, I think it trades at an unfair discount to some of the other peers,” Adam Gill, a Calgary-based analyst for Canadian Imperial Bank of Commerce, said in a phone interview.

While its assets in Canada’s Montney shale region require “a lot of capital” to develop and NuVista’s borrowing capacity will be reduced by the divestitures, the company comes out stronger because of the sales, according to Robert Fitzmartyn, managing director of institutional research at FirstEnergy Capital in Calgary. By slimming down, NuVista is making itself more attractive to a buyer, he said.

“It’s a cleaner-type asset base,” he said in a phone interview. “When you sell properties, it’s always a little bit of a spiral in that you lose borrowing capacity, so their credit lines will be coming down, but net-net, I think they’ll be ahead.”

Gas Condensate

The company is now focusing on developing natural-gas condensate, an oil-like substance that sells at higher prices than natural gas, at the Wapiti site. Sinopec agreed to buy Daylight Energy Ltd. last year, acquiring assets near those that NuVista is retaining.

NuVista has “got an asset that already is seeing Asian capital come in,” Fitzmartyn said. NuVista is “not markedly different than Daylight,” and for Sinopec, “clearly their appetite to acquire Canadian companies seems to not be diminished.”

While NuVista is smaller, its Montney assets may give it the same appeal that prompted Petroliam Nasional Bhd. to bid C$20.45 a share for Calgary-based Progress Energy Resources Corp. this year, according to Gordon Currie, senior oil and gas analyst at Salman Partners. That price was a 77 percent premium to Progress Energy’s prior closing level, and the offer was later increased to C$22 a share.

Similar Premium

A potential buyer of NuVista may have to pay a similar premium, Calgary-based Currie said in a phone interview. He estimates NuVista’s net asset value per share at C$11.63, according to a note dated Sept. 11, and said NuVista may seek more than that in a sale. The stock closed at C$4.58 yesterday.

Today, the shares lost 0.4 percent to C$4.56.

The company probably isn’t interested yet in selling because it’s focused on reducing debt and organizing its operations around the Wapiti project, said Joanne Angela Hruska, a Calgary-based fund manager at Aston Hill Financial Inc., which oversees C$5.6 billion.

Is NuVista’s goal “necessarily to be sold? No,” she said in a phone interview. “Will they be a potential takeover candidate? At least this makes it a little cleaner if there were to be an acquisition, but I believe it’s more about getting the debt down and focusing on the Wapiti.”

While Canaccord’s Kristjansen said the asset sales have made NuVista a more likely takeover candidate, the Calgary-based analyst sees the shares falling to C$4, down 13 percent from yesterday’s close. He recommends selling the stock.

NuVista’s borrowing reduction has put the company on the path toward potentially getting bought, Currie said.

“They’ve made themselves more survivable by reducing their debt,” he said. That will let the company focus on growth and it “makes them more attractive to a buyer.”

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