Analysts weigh in on Shell's acquisition of BG, implications for U.S. drillers
by Claire Poole in Houston
Royal Dutch Shell plc's (RDSA) $70 billion purchase of BG Group plc for a whopping 50% premium has analysts' tongues wagging about whether the industry is on the cusp of an M&A wave for U.S. exploration and production companies.
Pearce Hammond, an analyst at Simmons & Co. International, believes it's unlikely for several reasons: the bid-ask spread between buyers and sellers is wide; U.S. E&P stocks are discounting at least $70 per barrel, which makes valuation more challenging, especially if a buyer were to use Shell's price deck (Brent prices of $67 per barrel next year, $75 in 2017 and $90 in 2018-2020); the level of distress needed to incentive M&A has been lessened this year due to infusions from equity offerings and bank leniency on borrowing base redeterminations; and mergers' synergistic benefits aren't as readily apparent for U.S. exploration and production companies, which have small headcount per revenue dollar and the need to high-grade drilling inventory rather than add longevity to overall inventory.
Despite those reasons, Hammond said there are some U.S. E&P's eager to do deals, including QEP Resources Inc. (QEP) and WPX Energy Inc. (WPX). There are also some producers with a history of bolt-on transactions that have their guns loaded, including Concho Resources Inc. (CXO), which is less likely to pursue a corporate deal than a bolt-on; Diamondback Energy Inc. (FANG), which seems eager to get bigger in West Texas' and New Mexico's Permian Basin; and Chesapeake Energy Corp. (CHK) as a way to better balance its portfolio. "Overall, the predators should be producers with good balance sheets and the prey should be those with less pristine balance sheets," he said.
Analysts at Tudor, Pickering, Holt & Co. Securities Inc. think it's interesting that Shell has opted for an international acquisition rather than one in the U.S. shale and that the transaction could lead to deals among companies with international development assets, including Sweden's Lundin Petroleum AB, Cobalt International Energy Inc. (CIE), Genel Energy plc (which recently hired former JP Morgan investment banker Ben Monaghan as CFO) and Ophir Energy plc. However, they don't believe that Tullow Oil plc would attract a bid, especially given current legal issues with its TEN development off the coast of Ghana. "Shell's move ... is likely to reignite interest in a moribund space," they said. "XOM [ExxonMobil Corp.] has clearly signaled that it has been looking at acquisitions and other super-majors may be tempted to follow suit."
Others being mentioned in the market as possible targets include the perennial BP plc as well as EnQuest plc, Premier Oil plc, Gulf Keystone Petroleum Ltd. and Portugal's Galp Energia SGPS SA.