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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Three Possible Takeover Targets In The Canadian Oil Patch

As the current oil price slump stabilizes, showing only a modest rebound in prices since the start of the year, it is likely that more mergers and acquisitions deals will start to appear over the next year.

There has been a lot of speculation about mega-deals like an Exxon Mobil tie up with BP, or a buyout offer for unconventional leaders like Pioneer or Anadarko. So far, the sector has actually been fairly quiet though with both buyers and sellers likely trying to decide when and where long-term oil prices are likely to stabilize. Related: Busting The “Canadian Bakken” Myth

However, over the last couple of months the deep freeze has started to thaw and major deals could be in the offing. Royal Dutch Shell’s buyout offer for BG Group may represent the start of a wave of similar deals in the future. And one area where M&A deals may be particularly attractive is the Great White North of Canada. Analysts believe that significant M&A opportunities may appear in the space given (1) the need for cost cutting across the industry and (2) the safe geopolitical environment with rich resource reserves.

For those investors looking to get ahead of the game, there are several potentially interesting investments in the Canadian oil sands that would probably draw an offer from a suitor at the right price.

Canadian Oil Sands, which trades actively over the counter in the US and on the exchanges in Canada, is a prime example. The stock has fallen considerably as oil prices collapsed and the recent election of a left-leaning government in Alberta have raised concerns over the investment climate. Still, the firm owns the largest stake (~37%) in oil sands miner Syncrude. Imperial Oil, a subsidiary of Exxon Mobil, might be interested in a takeover of the firm, as might fellow oil sands player Suncor.

NYSE-traded Cenovus Energy is another possibility. The stock has fallen roughly half from year-ago levels, and while retail investors may be nervous about the political issues the firm faces with the new Alberta government, an experienced energy company with processes in place for engaging local officials would probably have far fewer qualms. Related: Seeing Some Success, OPEC Maintains Market Share Strategy

Cenovus raised capital earlier this year with an equity offering, and the firm is engaged in a cost-cutting program. As one of the weaker sizeable players in the oil sands area, the firm is certainly going to be on the radar screens of executives across the O&G space.

Oil sands development costs have come down dramatically, with Suncor announcing for example that it was able to produce a barrel of oil sands crude for less than 30CAD per barrel in the first quarter of 2015 vs. 40CAD five years ago. These types of efficiency gains at Cenovus would certainly make many buyers salivate.

Finally, maybe the most interesting acquisition target is an overlooked E&P company that goes by the name of Enerplus Corp. The most enticing thing about Enerplus are not necessarily its oil and gas assets, but its tax pool assets. Tax pools are a form of tax credit that can be claimed against income as a result of capital spending programs. Related: Could Natural Gas Dominate Global Transportation Soon?

The pools are important, especially for junior E&P firms as they allow the shielding of cash flows from the tax authorities. This is likely to become an even more important issue if Alberta starts to raise taxes in some form on energy companies. Enerplus has a very substantial tax pool – one of the largest in the region – and this asset would enable the company to shield its Canadian cash flows from taxes for years to come. With that in mind, Enerplus could well be an under-the-radar buyout candidate.

By Michael McDonald Of Oilprice.com

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