‘Tis the season for natural gas — and takeovers
Winter heats up demand for natural gas, says an oil patch insider, while events stir up the market for takeovers among energy stocks.
When snow comes early, Christmas seems a lot closer.
Or as one oil patch insider muses after the unseasonable October cold spell on the prairies: “Christmas came early in Cowtown and it’s not always a good thing when there’s snow on the ground before Thanksgiving — and we’re talking the Canadian version.”
But it also heralds another season — the heating season, when the call goes out for natural gas.
“And if you’re a small gas-focused junior, you’ve probably been scalped, or worse, gone prematurely bald,” says this insider, known only as Wildcat Willie to the readers of Investor's Digest of Canada.
Things may start looking up for natural gas as the seasons change. But there’s another season upon us as well, this observer tells us.
It’s the season of takeovers. It’s time for consolidation in the industry. We’ll see three examples of the changes bubbling up.
The end in sight
The good news for beleaguered gas juniors, says Wildcat Willie, “is that the end is in sight. Gas is coming into its seasonal high point and there are plenty of good buys out there, both in terms of stocks, as well as entire companies as fodder for the acquisition market.”
That takeover activity is sure to be stirred even further by the onset of the January 2011 distribution tax deadline for income trusts. The oil and gas royalty trusts are bracing for the change.
“The next six months or so will probably be the last two (relatively) big quarters for the trusts before they convert back to corporations,” says Willie, “and as a group they’re going to be talking growth. That necessarily means consolidation.”
Re-sowing wild oats
We start with a “template.” Earlier this year Progress Energy Resources Corp. (TSX-PRQ) bought its “smaller sibling” Pro-Ex Energy.
“Actually, it was a reverse takeover by Pro-Ex if you want to get picky,” Willie explains. “In case you forgot,” he adds cheekily, “Pro-Ex was a so-called ‘explorco’ spun out of Progress almost a decade ago when it first converted to a trust.”
The merger put Progress back in the corporate camp and turned it into a “mid-sized, natural gas-weighted exploration and production company,” in its own words.
It has maintained its quarterly dividend at $0.10 a share and launched a Dividend Re-Investment Program. The yield is 2.9 per cent and the shares are currently trading at $14.05, about a dollar and a quarter below their 52-week high.
Progress has become “a template deal for trusts looking to re-sow some wild oats and get back into exploration mode,” adds our insider.
Hard to beg
By next month, on the other hand, Breaker Energy Ltd. (TSX-WAV) will have disappeared into the arms of an income trust. In mid-October, it was announced that it would be taken over by NAL Oil & Gas Trust (TSX-NAE.UN).
Breaker was another of those many spin-offs that occur in the industry, formed by ex-executives of EnCana who took packages after the new company was formed in 2002.
“It takes that long to put a half-decent company together,” Willie explains. The process for Breaker was even slower than usual, thanks to the financial circumstances of the past few years.
“And it’s still hard for little guys to beg for what they need, thanks to the bankers that created the problem,” Willie states firmly. But the smaller company does bring one extra advantage to the trust.
It has tax pools of over $200 million “that become extremely valuable when trusts like NAL become taxable after 2011. NAL has given no indication that it will convert back to a corporation any time soon, when there’s still half a dozen quarters left to be trustafarians,” adds our insider.
In the meantime, Breaker adds its oil and gas exploration and development prospects to the trust’s conventional oil and gas assets. Breaker trades today at $5.60. NAL is trading at $12.05 with an annual distribution of $1.08 and a lofty yield of 9.3 per cent.
Glass more than half full
“Back in the old days,” reminisces Willie, “before oil became a proxy for currency translations, oil and natural gas used to trade on roughly an energy equivalent basis of 10 times.” So if oil were $80, gas would be $8.
But today oil is $80 while natural gas is only $4.80. “That means gas is only trading for about half the value of crude these days, if the glass is half empty. Or, oil is trading for double the price of gas, if it’s more than half full,” says Willie.
He concludes with a company that’s “all oil — every last drop.” But it, too, is going through changes. Glamis Resources Inc. (TSX/V-GLM.A) voted a few months ago to convert its Class A shares into common stock, consolidate them at six to one and change its name to Legacy Oil and Gas Inc. The full consolidation and name change will come later.
When it does, says Willie, the shares should trade at the $10.00 “sweet spot” he likes. They’re at $1.71 today.
The newly consolidated firm is focusing its attention on the intriguing and unconventional Bakken oil play in Saskatchewan — “the single malt of crude oil,” in our insider’s words.
But there’s a larger method to this consolidation madness, he informs his Investor's Digest of Canada readers.
Being entirely focused on oil “is a good hedge while you snap up struggling natural gas producers,” he tells us. So keep your eye out for more consolidation down the road.
“Consolidations are usually good opportunities to buy, the stock tends to drop on a relative value basis before resuming an upward tack. It’s a no-brainer.”
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