Sinopec Turning Daylight Chinese Puts Talisman-Newfield in Play: Real M&A
China Petrochemical Corp.’s takeover of Daylight Energy Ltd. (DAY) shows how the oil industry’s biggest selloff since 2008 is transforming companies from Talisman Energy Inc. (TLM) to Newfield Exploration Co. (NFX) into potential targets.
The two were among 19 oil and gas explorers valued at a discount to Daylight, which traded at 5.6 times earnings before interest, taxes, depreciation and amortization before agreeing Oct. 9 to sell itself, according to data compiled by Bloomberg. Including net debt, the state-owned refiner known as Sinopec will buy Daylight in the industry’s cheapest purchase this year, even as it pays the largest takeover premium since 2005.
Sinopec is taking advantage of the biggest slump in energy stocks since the credit crisis as China and the developing world compete to secure resources for economies forecast to grow three times as fast as the U.S. or Europe next year. Talisman, which operates in Southeast Asia, North Africa and Iraq, and Newfield, which has fields in the Bakken oil formation in Montana as well as in China, may attract interest from buyers after both fell at least 35 percent last quarter, Hedgeye Risk Management said.
“If I’m China, I want to see ever-increasing oil,” Timothy Parker, a portfolio manager who oversees about $4.3 billion in natural-resource stocks at T. Rowe Price Group Inc., said in a telephone interview from Baltimore. “This is a riper time for consolidation given the price weakness.”
David Mann, a spokesman at Talisman, and Keith Schmidt of The Woodlands, Texas-based Newfield said their companies don’t comment on rumors or speculation.
Talisman rose 4.3 percent to C$12.73 in Toronto, while Newfield slipped 1.8 percent to $42.34 in New York.
Sinopec agreed to buy Calgary-based Daylight for about C$2.2 billion ($2.1 billion), or C$10.08 a share, according to a statement. The agreement was more than twice the value of Daylight’s price of C$4.59 a share last week and 72 percent higher than its 20-day average, data compiled by Bloomberg show.
Daylight’s stock surged 110 percent to C$9.64 in Toronto.
While the premium was the highest for a billion-dollar acquisition in six years, Sinopec was able to get the lowest Ebitda multiple in an oil and gas takeover this year as Daylight’s stock plummeted 43 percent last quarter.
Including about C$711 million in net debt, the deal valued Daylight at 9.43 times Ebitda, data compiled by Bloomberg show. Every other takeover in the industry this year was struck at 13.5 times or more. The per-share offer is still lower than Daylight’s high this year of C$11.70 in April.
The share-price decline is “giving an opportunity for a deep-pocketed buyer to say, ‘Hey, I’ll give you that premium and make you whole from where you are, but that’s still a good deal for me,’” said T. Rowe’s Parker.
Oil and gas producers were pummeled as Europe’s sovereign debt crisis and a deteriorating recovery in the U.S. heightened concern the global economy will fall back into a recession, curbing demand for fuel.
After reaching a 2 1/2 year-high in April, a gauge of energy stocks in the MSCI All-Country World Index of developed and emerging markets slid as much as 30 percent.
Last quarter, the 169 oil and gas companies in the index slumped 22 percent, the biggest slide since the period following the collapse of Lehman Brothers Holdings Inc. in 2008, according to data compiled by Bloomberg. The drop from July through September was more than double the decline in Brent crude during the same period, the data show.
“There’s a lot of companies trading at significant discounts just on fears of a double dip,” Jeremy McCrea, an analyst at Alta Corp Capital Inc. in Calgary, said in a telephone interview. After Sinopec’s Daylight takeover, “there could be some other companies in play,” he said.
Asian companies may spend $150 billion on acquisitions in the next five years to secure energy resources for their faster- growing economies, according to Sanford C. Bernstein & Co.
“They’re flush with cash and they’re short on energy,” Louis Gagliardi, managing director of energy at investment- research firm Hedgeye, said in a telephone interview from New Haven, Connecticut. “It’s going to motivate them to be buyers at distressed prices like these.”
Led by China, nations in the developing world may grow by 6.1 percent next year, estimates from the Washington-based International Monetary Fund showed. The U.S. and western Europe may expand less than 2 percent.
There were 19 oil and gas exploration and production companies with market values from $1 billion to $15 billion that were cheaper than Daylight was before its agreement with Sinopec was announced. On average, they were valued at 4.1 times Ebitda after dropping more than 30 percent last quarter, according to data compiled by Bloomberg.
Talisman, the largest among the group with an equity value of C$12.6 billion, plunged 35 percent last quarter. The decline accounted for most of this year’s drop.
The slide left the Calgary-based oil and gas producer worth just 3.6 times its Ebitda for the last 12 months, about half this year’s high of more than 7 times, data compiled by Bloomberg show. While Talisman cut its annual production target last week for the second time in about two months, analysts project it will boost earnings by 80 percent in 2012.
It had 1.15 billion barrels of proven reserves of oil and gas at the end of last year, the second-highest amount of any company trading at a discount to Daylight.
“They have decent underlying assets that could attract a higher valuation by the market if there’s better execution,” Lanny Pendill, an analyst with Edward Jones & Co. in St. Louis, said in a telephone interview.
Newfield was valued at 5.1 times Ebitda yesterday after slumping 42 percent last quarter, data compiled by Bloomberg show. The company’s proven reserves are worth about $58 a share excluding debt, 34 percent higher than its price of $43.13 yesterday, according to Brian Lively, an analyst for Tudor Pickering Holt & Co. in Houston.
It holds “leading positions” in the Montana portion of the Bakken formation, which may hold 2.6 billion barrels of recoverable oil, a report last week from Wood Mackenzie said. Newfield also generated almost 25 percent of its revenue in China and Malaysia last year and had 619 million barrels of proven oil equivalent reserves, the most of any U.S. producer from the list of companies compiled by Bloomberg.
“It’s screaming cheap,” Tudor Pickering’s Lively said in a telephone interview. “They have a good asset portfolio across the U.S. and they’re operationally very good.”
Energy companies may find it more difficult to finance exploration as investors shun all but the safest corporate bond offerings in the face of Europe’s crisis and the U.S. slowdown, which may lead to more acquisitions.
The extra yield investors demand to own investment-grade corporate bonds globally instead of government debt grew last week to the widest since July 2009, data compiled by Bank of America Corp.’s Merrill Lynch unit show. Yields for issuers rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P rose to 10.5 percent, the most since October 2009.
“A lot of these companies would prefer to grow faster, but they can’t because there’s no access to capital,” Geoff Ready, an analyst at Haywood Securities LLC in Toronto, said in a telephone interview.
While energy companies may be more willing to sell to foreign buyers, one of the biggest obstacles to cross-border oil deals remains the regulatory scrutiny that acquirers face in certain regions, Hedgeye’s Gagliardi said. That’s why some Asian companies have formed joint ventures in North America and Europe instead of buying companies outright, he said.
Political opposition derailed a $19.4 billion offer for El Segundo, California-based Unocal Corp. in 2005 by Cnooc Ltd. (883), China’s largest offshore energy producer. That left Chevron Corp. (CVX) of San Ramon, California, as the winning bidder.
Still, the decline in shares of energy companies are now making takeovers too compelling for strategic buyers to pass up, according to Michael Breard, an energy analyst for Hodges Capital Management Inc. in Dallas.
“It’s just a good time” for takeovers, he said in a telephone interview. “You’ve got stock prices that have dropped considerably and people who are looking for acquisitions. The stock market is looking at what’s happening in the next 20 minutes, but the major oil companies and the Chinese buyers are looking at what’s happening in the next 10 years.”
Company List: Bill Barrett Corp. Cimarex Energy Co. Dragon Oil Plc Energen Corp. EnQuest Plc Etablissements Maurel & Prom SA Forest Oil Corp. Gran Tierra Energy Inc. KazMunaiGas Exploration Production Newfield Exploration Co. Nexen Inc. PetroBakken Energy Ltd. Petrominerales Ltd. QEP Resources Inc. Swift Energy Co. Talisman Energy Inc. Total Gabon W&T Offshore Inc. Whiting Petroleum Corp.