Is Surge Energy Getting a Good Deal?

The energy producer buys a 20% stake in Longview Oil.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It still pays to be the only buyer in a buyer’s market. Whether it’s gold mining, copper mining, or energy, certain companies have managed to put themselves in that enviable position. And just last week, we saw yet another example.

On Friday, Surge Energy Inc (TSX:SGY) revealed that it owed a 19.8% interest in Longview Oil Corp (TSX:LNV), and planned to pursue a “business combination”. The revelation was the latest in a chain of events that began at the beginning of February. Advantage Oil & Gas Ltd (TSX:AAV) concluded a strategic review – another way of saying the company was looking to sell itself – that “did not result in an acceptable proposal”. Given the state of the Canadian energy market, such a result was not surprising.

But Advantage needed cash, and it owned over 20 million shares of Longview. So it sold those shares to a banking syndicate at $4.45 per share, raising $94 million. The banks then approached Surge about buying those shares. Surge, which had already done due diligence on Longview’s assets, jumped at the opportunity, buying the shares at the same price.

It appears that Surge got a great deal on the shares. The net present value of Longview’s reserves (10% discount rate after tax) is over $500 million, about $11 per share. Longview’s debt takes that number down to $8.50 per share, but still well above what Surge paid. And that does not even include any cost savings that Surge could achieve from combining the two firms’ operations. Any synergies would only make a combination sweeter.

Surge is now in the driver’s seat. The company would like to buy the rest of Longview, but is under no pressure to do so. If Surge decides to wait, then the company will be collecting a dividend yield of over 10% (based on the $4.45 selling price). And those dividends come tax-free.

Foolish bottom line

Of the three companies, Surge has by far the cleanest balance sheet, with debt equal to only 18% of its market capitalization. This compares to 44% for Advantage and 47% for Longview. It’s no wonder that Surge is in the best position of the three companies. In a buyer’s market like Canadian energy, Surge’s flexibility puts it in an enviable position.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Stocks for Beginners

New Investors: Follow the KISS Model With These 3 TSX Stocks

These TSX stocks keep it super simple for new investors. You'll need each of these services over the next decade…

Read more »

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »

A airplane sits on a runway.
Investing

Why Did Bombardier (TSX:BBD.B) Stock Surge Over 75% in a Month?

Bombardier (TSX:BBD.B) stock has surged over 75% in last 30 days after strong second-quarter earnings. Is it a buy at…

Read more »

financial freedom sign
Stocks for Beginners

Millennials: Pay Down Debt and Get Rich in Just 1 Decade

Millennials continue to have huge debt on their hands, but they can pay it off and become rich by getting…

Read more »

Cogs turning against each other
Dividend Stocks

2 of the Safest Stocks (With Dividends) to Buy in Canada Now

Here are two of the safest stocks investors in Canada can buy now.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

Got $1,000? Buy These 3 Top Growth Stocks

These three Canadian growth stocks could deliver superior returns over the long run.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Top Canadian Value Stocks Worth Buying Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two top value stocks to consider right now.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Ivanhoe (TSX:IVN) Had a Record Quarter: Should You Buy the Stock Today?

Ivanhoe Mines Ltd. (TSX:IVN) delivered record profits in its Q2 2022 earnings, which should spur investors to look hard at…

Read more »