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Speculation mounts after Shell deal

Who’s next in the oil and gas merger pipeline?

North Sea rigShell’s blockbuster acquisition of BG Group has not only created the second biggest company on the London Stock Market, it has sparked a flurry of excitement over which companies might be next in the oil sector to tie-up a merger.

Since the collapse in the oil price from around $115 a barrel last summer, speculation has been rife that firms would seek to consolidate and cut costs.

In recent weeks the price has settled at between $50 and $60 with opinion divided on whether it will plunge lower or begin a steady rise to a more sustainable level at around $70 to $80.

Chancellor George Osborne attempted to install some confidence in the sector with a series of tax breaks in last month’s budget which gave the North Sea players some breathing space. Those which gained from the measures included Xcite Energy, Parkmead and Trapoil, which gained 5%, 4.5% and 12% respectively on the day.

But shares in listed oil companies have drifted downwards in line with the oil price and the markets believe a new wave of takeovers is imminent. Shell’s move suggests that it believes the price has bottomed out and that this is now a good time to buy.

According to US analysts, the most likely targets are spin-offs. They represent good value and lower risk as the parent has already done the hard work of getting them ready for an independent existence. They lack the history and scale of their former owners to withstand predators.

Even so, some favourite takeover targets will include familiar names among the bigger operators.

So who might be the next prey or predator in the takeover pipeline?

Tullow Oil (sidelines)

Year high: 918.5p
Year low: 278.1p
Latest: 326p

Tullow’s stock is expected to remain volatile whilst oil prices are depressed, according to Hargreaves Lansdown. The broker says Tullow’s assets may well attract the attention of an oil major one day. But whilst big oil companies are focused on trying to pay their own dividends, they are unlikely to come knocking on the door of an E&P company that recently said it cannot support its own dividend with the near term cash flows of its own business.

As and when the oil price recovers, it could be a different story, but until then investors can expect little support from exploration, because that is being cut back hard, whilst revenue growth is most unlikely this year, due to the oil price, but may provide some support as we move into 2016 when production volumes should start ramping up.


Faroe Petroleum

Year high: 154.75p
Year low: 58.5p
Latest: 87p

It has invested in the Norwegian sector of the North Sea, as opposed to in Britain’s territorial waters, so benefits from the Scandinavians’ generous tax incentives. The Oslo government refunds 78p in every £1 invested in exploration and development.

The company luckily raised £62m ahead of the drop in the price of oil. Capital spending is expected to be modest this year and its four test wells can be fully funded from existing cash flow. Furthermore, two of the aforementioned prospects are near the promising Pil discovery made last year.


Parkmead (predator)

Year high: 245.5p
Year low: 101p
Latest: 115p

The Parkmead Group is a specialist investment company based in Aberdeen and chaired by Tom Cross who sold Dana Petroleum to the Koreans. The Parkmead Group invests in both E&P companies and licences with a focus on the Middle East, Africa and Europe.

Last month it told investors it is evaluating more acquisition opportunities as it looks to take advantage of low oil prices.

He says it is in a strong position, operationally and financially, and views the current market environment as a good opportunity to continue the group’s strong growth trajectory.

The company has already completed six transactions since it set up as a new independent, and last year it secured additional acreage via the UK government’s licensing round. It now owns at total of 61 oil and gas blocks, in the UK and Netherlands.

In the year, ended 31 December, Parkmead generated £10.1m of revenue and it reported a £14.9m loss – including non-cash impairments relating to the Athena field and low crude prices. Excluding the impairments, the group would’ve made a £2m loss.

Parkmead ended the year with £39.4m in cash and equivalents. Cross said Parkmead is well positioned to take advantage of the lower oil price environment.

He clearly sees it as buyer rather than seller. Then again, he didn’t want to sell Dana.


Trapoil (prey)

Year high: 10.1p
Year low: 0.63p
Latest: 0.72p

Shares fell last month after activist Swedish investor Petr Gyllenhammar continued to increase his stake in the AIM-listed oil and gas explorer.

Operating through his Union Discount Company of London and Bronsstädet vehicles, serial AIM investor Gyllenhammar increased his holding to 22.5%, having taken it up from nearer 18% to 21.75% in February.

The entrepreneurial Swede does not have a seat on the board, yet, but analysts expect him to be looking to secure one.

In January the company notified the market that at the end of 2014 it had net unrestricted cash reserves of roughly £7m, having paid workover costs on its 15%-owned Athena property, as well as the majority of the expected abandonment provision on the North Sea field, as well as well as pre-paying expected drilling costs for the nearby Niobe prospect.

Trap plans to pay the final Athena instalment of roughly £1.3m during 2015, it said.

It remains a minnow that just might get overlooked in any takeover stampede, unless Gyllenhammer has other ideas.


Xcite (prey)

Year high: 96p
Year low 24.75p
Latest: 28.13p

Xcite Energy is a heavy oil appraisal and development company, with current interests in three licence blocks in the UK North Sea, all of which are held with 100% working interests through its wholly-owned UK subsidiary, Xcite Energy Resources Limited. Its primary focus is in bringing the Bentley oil field on Block 9/3b into production and in doing so becoming a significant independent oil producer in the North Sea by 2014.

Shares rose 7% last November when it struck a deal with China Oilfield Services over a rig for the Bentley field in the North Sea. The high-spec jack-up rig will be built at China’s Keppel FELS yard in Singapore.

It has been a firm favourite with private investors who continue to wait for the promised returns.


Ophir (predator)

Year high: 270.2p
Year low: 112.7p
Latest: 157p

It hopes to use a $1bn war-chest to pick up cheap assets amid the broader turmoil in the sector, which against a backdrop of lower oil prices is seeing significant cutbacks for new projects.

Analysts say Ophir is in a particularly strong position to do deals, having sold stakes in major offshore gas projects for $1.28bn during 2014.

It ended the year with $1.17bn of cash, and chief executive Nick Cooper says the firm is in the process of making some US$250m of savings and capex reductions between now and 2017.

Ophir doubled its exploration footprint after committing  just $100m for the next two years.

Cooper told investors last month: “There is a unique opportunity at the moment to acquire exploration acreage at low cost and with minimal work commitments.

“We are able to offer investors unique access to a high class exploration portfolio where only the prospects that offer the best potential returns are drilled.”

Premier (prey)

Year high: 358.6p
Year low: 119.6p
Latest: 153p

The company was a target for Ophir last April when the board unanimously rejected the approach and Ophir walked away. It had the option to return six months later, but didn’t. Whether it will come back is another matter.

French bank Societe Generale notes that over the last 12 months both companies have under-performed sector peers, and that the bid approaches took place after Premier’s chief executive officer (CEO) Simon Lockett announced his intention to step down.

However, analysts noted that Ophir’s more significant share price decline reflected a fall in the value attributed to its higher risk exploration portfolio, which has also been impacted by dry wells in Tanzania and Gabon. SocGen was sceptical about the Premier approach saying that it saw “little geographical or strategic fit for Premier’s assets within Ophir’s portfolio”.

It regarded the approach as an “opportunistic attempt to reach critical mass and enhance risk profile”.

Last month Premier’s Pelikan field off Indonesia produced its first gas, which follows the nearby Naga field, and Premier says both projects were brought online on budget.

Together they have the capacity to deliver up to 200 British thermal units per day and the gas is sold to Singapore under long term contracts.

Pelikan and Naga gives Premier increased operational flexibility, it said, and additional volumes to be supplied to meet growing market demand.

Premier has a 28.67% stake in the Natuna Sea block, which hosts both fields.


BP (predator or prey)

Year high: 526.8p
Year low: 364.4pp
Latest: 462p

BP was mooted as a partner for Shell, a tie-up that now looks unlikely. It continues to reduce costs and manage capital expenditures as it tries to reshape cash flows to adjust to the lower oil price environment.

Hargreaves Lansdown says BP offers investors a high dividend yield, currently circa 5.8% (variable and not guaranteed). “This high yield is a function of the risk the market perceives, that BP may be forced to cut the dividend in future, if the current low oil price continues,” it says.

BP is slashing capital expenditure (capex) and operating expenditure (opex) to try and balance the books whilst protecting shareholders. But it remains liable for further large penalties relating to the Gulf oil spill in 2010. Oil production is likely to be flat in the current year, so volumes are offering little respite to the pressure on cash flow.

BP expects to recoup around $5bn from selling assets, but this will reduce cash flow in future years. Politics makes it hard to extract cash benefits from the stake in Rosneft currently, too. They also face the likelihood of further multi-billion dollar fines yet to come, relating to the 2010 Gulf of Mexico oil spill.

BP is in the position of wanting to be good to shareholders, but in truth its hands are tied. If the price of oil stays down, we fear that ultimately, BP has to make a difficult decision about the dividend. The yield on the stock, presently 5.8%, (variable, not guaranteed) should be seen as indicative of the risk attached to the dividend in the current era of low oil and gas prices.

Note: These comments should not be taken as a recommendation to buy or sell shares in any of the companies mentioned above. Investors should note that investing in shares carries risk and that the value of investments can go down as well as up.



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