Compared to the rest of the sector, investors in Talisman Energy Inc. (TSX:TLM)(NYSE:TLM) are looking pretty.
That’s because the company finally gave into the advances of Spanish energy giant Repsol and agreed to be acquired at US$8 per share. Rumours were that Repsol was interested in Talisman for years before this latest oil downturn, and it just couldn’t resist once Talisman’s shares tanked. It offered a generous premium for the shares back in December, and Talisman’s shareholders are set to vote on the proposal in February. At this point, the deal looks like it’s going to go through.
It’s obvious that it isn’t just Repsol that’s looking around the world for assets. Most large energy companies are practically salivating at the chance to acquire assets while the market is depressed. Many smaller players are struggling with debt, making them perfect targets. It’s only a matter of time before more deals start happening.
Although I’d never suggest buying any company because you think it might get acquired, having that potential exit plan is just another reason to buy a stock that represents good value. And in Canada’s oil patch, there are a lot of cheap assets out there. Here are three companies that could fit the bill.
It’s been a long year for shareholders of Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE).
The company’s shares were dragged down by a number of factors before finally succumbing to the collapse in oil. Shares started 2014 at more than $9 each; by the end of the year, they traded hands at around $2.50. The market quickly realized that Penn West was in some serious trouble if oil stayed under $50 throughout 2015.
For a company with the ability to service Penn West’s nearly $2 billion in debt, buying the company today is a great opportunity to pick up some cheap assets. Penn West’s equity is worth just $1 billion as I write this, meaning an acquirer could come in and offer $2 billion for the shares and assume the debt. That works out to about $4 per share for Penn West’s stock, which currently has a tangible book value of $10 per share.
The only question is whether Penn West’s shareholders would be willing to let the company go for such a low price.
Lightstream Resources Ltd. (TSX:LTS) has some terrific assets. It also has a lot of debt. According to analysts’ projections, the company’s debt-to-EBITDA ratio is expected to soar to 10x in 2015, far above what lenders will allow. This will lead to a breach of its debt covenants.
Management has all but waved the white flag, announcing last month that it would put its lucrative Bakken assets on the auction block. As recently as this summer, production from the region was profitable enough that the company reported netbacks north of $50 per barrel. Analysts expect that these assets could fetch as high as $1 billion, but that may be aggressive considering the market we’re in.
Instead, a company might just swoop in and acquire the whole company. Lightstream’s market cap is a minuscule $176 million, and the company has approximately $1.5 billion in debt. Bidding $500 million for the company and assuming the debt might get a deal done, considering that shareholders are practically staring bankruptcy in the face.
There are two main reasons why a suitor might take a run at Athabasca Oil Corp (TSX:ATH). It has some great oil sands reserves and a ton of accrued tax losses.
Let’s start with the tax losses. Athabasca is sitting on approximately $2 billion worth of tax credits it can use towards future gains. That’s a lot, especially for a company so beaten down that it has an enterprise value of less than $900 million.
The company is currently investing heavily in two main assets, Hangingstone and the Duvernay. Hangingstone is projected to produce 12,000 barrels of oil per day by the end of the year, with potential for 80,000 barrels per day by 2019. The Duvernay has a similar timeline, with production expected to pass 60,000 barrels per day by 2019.
But it’ll likely take at least $1 billion in investments to get production to that point. Although Athabasca has a decent balance sheet, it will look attractive to a potential suitor looking to acquire assets on the cheap.
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Fool contributor Nelson Smith owns shares of PENN WEST PETROLEUM LTD..