Coastal Energy Offers Seen for Thailand Oil: Real M&A
Coastal Energy Co. (CEN), a Houston-based explorer for oil off Thailand’s shores, is enticing traders with the prospect of the energy industry’s next bidding war.
A director at Indonesia’s state-owned oil producer PT Pertamina said yesterday that the company sent a takeover proposal to major Coastal Energy shareholders. Because Coastal Energy operates mostly in the Gulf of Thailand, that nation’s state-controlled PTT Exploration & Production Pcl is among those that may mull an offer, Canadian Imperial Bank of Commerce said.
That’s an opportunity for traders to make money after only 18 of more than 9,300 deals worldwide this year got competing offers, according to data compiled by Bloomberg. CIBC said a buyer could pay as much as C$26.50 a share for Coastal Energy, 38 percent more than its Nov. 5 price, before the stock rose amid takeover speculation. The C$2.4 billion ($2.4 billion) company is alluring because it can boost production even after doubling output last quarter, and its cash flow more than pays for drilling projects, Jennings Capital Inc. said.
“It seems very likely that there could be a bidding war here,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “The PTT’s of the world are going to be looking at these assets. This is in their backyard,” he added. “A state-owned enterprise could be competing against multinationals and other state-owned enterprises. That is good for Coastal Energy shareholders.”
Pertamina expects a response to its proposal next week, Mohamad Afdal Bahaudin, the oil producer’s investment planning and risk management director, said yesterday in a text message.
The Indonesian company may offer about $23 a share, valuing the target at $2.6 billion, the Financial Post reported Nov. 6. Coastal Energy released a statement later that day saying it’s always considering strategic alternatives, including a potential sale of the company. “There can be no assurance that any transaction will occur,” the company said. Coastal Energy’s Canada-listed shares climbed 6.3 percent on Nov. 6 and added 3.5 percent yesterday, closing at C$21.08.
Today, Coastal Energy advanced 3.8 percent to C$21.87 at 12:36 p.m. Toronto time, heading for a record high close. The shares climbed even as the Standard & Poor’s/TSX Energy Index declined 0.7 percent.
Matthew Laterza, a spokesman for Coastal Energy, didn’t respond to a phone call or e-mail seeking comment.
CIBC’s Ian Macqueen and Gregory Chornoboy, a Calgary-based analyst with Jennings Capital, both said the most logical alternative suitor is Thailand’s PTT Exploration & Production (PTTEP), which is majority owned by Bangkok-based PTT Plc, the state- owned producer.
PTTEP is “the natural buyer,” Macqueen, a Calgary-based analyst at CIBC, said in a phone interview.
“The company hasn’t done anything on this,” Penchun Jarikasem, PTTEP’s executive vice president for finance, said by phone. “We didn’t study anything about Coastal Energy and are not interested to buy a stake.”
Coastal Energy, founded in 2004, owns two blocks in the Gulf of Thailand that span 4,926 square kilometers (1.22 million acres). The company also has stakes in onshore assets and a natural-gas field in the country, and a contract to develop petroleum from a cluster of fields offshore Malaysia owned by Petroliam Nasional Bhd., the state-run producer known as Petronas.
Coastal Energy’s Thailand assets include the Bua Ban field. Its discovery was “game changing” for the company and will lead to more oil finds in the area, making Coastal Energy appealing to larger companies, said CIBC’s Macqueen. He estimates that Coastal Energy’s output will climb to about 34,000 barrels of oil equivalent per day next year. The company produced 21,713 barrels a day in the quarter ended June 30, more than double the level a year earlier.
“They’ve only really explored a small portion” of the company’s territory off Thailand’s coast, Macqueen said. “They’ve got a long reserve life. That’s why I see a substantial increase in production between 2012 and 2013.”
Coastal Energy’s cash generation makes it an appealing target, said Jennings Capital’s Chornoboy. While the average oil producer larger than $1 billion has negative free cash flow, Coastal Energy throws off free cash equal to 6.8 percent of its market capitalization, according to data compiled by Bloomberg.
“It’s self-financing,” Chornoboy said in a phone interview. “The production and cash flow will more than cover the capital requirements for all of the drilling and facilities construction they want to do.”
FirstEnergy Capital Corp.’s Stephane Foucaud said the $23- a-share (C$23.07) price that the Financial Post reported Pertamina offered is too low.
“If this offer was confirmed, we recommend shareholders not to take it, as we believe this may just be a starting point,” the London-based analyst wrote in a note to clients yesterday.
Bids could top C$26 a share, Chornoboy said. Macqueen estimated Coastal Energy’s net assets could fetch as much as C$26.50, and said a buyer could pay that amount and “still realize significant upside.”
Macqueen’s forecast is 47 percent higher than Coastal Energy’s 20-day average price as of Nov. 5, before takeover speculation drove a two-day rally of 10 percent. That compares with an average premium of 51 percent for industry deals larger than $1 billion announced in the last two years, data compiled by Bloomberg show.
Buyers in those transactions paid a median of 14.3 times earnings before interest, taxes, depreciation and amortization, the data show. Coastal Energy was valued at 6.5 times Ebitda as of yesterday.
Pertamina’s interest follows three other attempts by state- owned energy companies to expand through acquisitions.
PTTEP, Thailand’s biggest publicly traded oil and gas explorer, won a bidding war in July for London-based Cove Energy Plc after Royal Dutch Shell Plc (RDSA) dropped out of the race for the explorer focused on East Africa, ending a five-month battle.
Petronas offered in June to acquire Calgary-based Progress Energy Resources Corp. (PRQ) While the agreement was rejected by Canada, Petronas signaled that it’s open to negotiating with the government. Cnooc Ltd. (883), China’s largest offshore oil and gas explorer, agreed in July to buy Calgary-based Nexen Inc. (NXY) That transaction is also pending Canadian approval.
While merger arbitrage traders often seek out deals where there is a high likelihood of a competing bid, there haven’t been many this year. Among the 9,348 takeovers announced in 2012, only 18 drew rival offers, or 0.19 percent, data compiled by Bloomberg show. Last year, there were 30 bidding wars, or 0.25 percent of the 11,892 announced deals.
Tullett Prebon’s Shah said traders will be watching to see if multinational producers such as Shell or companies based in Asian emerging markets, including PTTEP or Petronas, might try to top Pertamina.
Kayla Macke, a spokeswoman for The Hague-based Shell, and Azman Ibrahim of Kuala Lumpur-based Petronas declined to comment on whether their companies would consider a bid for Coastal Energy.
In emerging economies, “consumption of energy is growing exponentially,” Shah said. “When the asset is close to home, why wouldn’t you at least bid? Arbs definitely will be watching this closely. It’s hard for me to believe that $23 is the ceiling.”
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