Recently, Canadian energy giants Strathcona (TSX:SCR) and Cenovus Energy (TSX:CVE) have been locked in a bidding war over the smaller pure play E&P, MEG Energy Corp (TSX:MEG). The two larger companies have made their bids for the smaller E&P and look committed to closing the deal.
The stakes involved here are relatively large. MEG is a $7.4 billion market cap company, and Strathcona is offering $7.8 billion. Even after the deal’s announcement, upside remains in the event of a successful close.
There are two factors complicating the matter for Strathcona:
- MEG’s lack of interest in the deal.
- Cenovus Energy’s competing $7.9 billion offer.
Strathcona has attempted to buy out MEG Energy before. MEG’s board never approved the deal and (naturally) no deal ever closed. This time around, things appear no different. After receiving Strathcona’s offer, MEG’s board reportedly felt “grumpy,” not wanting to discuss the matter. So, it seems unlikely that they will approve the deal and recommend that shareholders vote in favour of it.
Second, Cenovus has made a competing offer for MEG worth $7.9 billion. This is currently $100 million more than what Strathcona’s deal is worth. Since Strathcona’s offer is an all-stock offer (0.8 SCR shares for each MEG share), the value could change. However, right now, Cenovus looks like the favourite to win any showdown here – assuming that one happens at all.
What MEG is worth
The obvious play here, if you think that either SCR or CVE’s takeover offers will actually close, is to go long MEG shares. Both of the tabled offers are above MEG’s current stock price, so there is money to be made if one of them closes. At the same time, nothing is ever guaranteed. Investors shouldn’t buy this stock unless they think it makes sense with or without an M&A deal closing. With that in mind, let’s take a look at the company that’s potentially being bought here.
In the trailing 12-month period, MEG Energy delivered the following financial results:
- $4.3 billion in revenues.
- $2.4 billion in gross profit.
- $794 million in operating income.
- $551 million in net income.
- $639 million in free cash flow.
Most of these metrics were down on a year-over-year basis when they were reported. As a result, MEG boasts the following growth metrics:
- Revenue: -23%.
- Operating income: -19%.
- EPS: -1%.
It’s not a great showing on growth, but could MEG be cheap enough to make up for it?
In my opinion, probably not. At today’s prices, MEG trades at:
- 13.8 times earnings.
- 1.8 times sales.
- 1.6 times book value.
- 5.4 times operating cash flow.
These metrics are lower than average for the TSX as a whole, but above average for TSX Energy stocks. Suncor Energy – a far better business –trades at just 12 times earnings.
Foolish takeaway
Considering everything I’ve looked at in this article, I am not interested in buying MEG stock today. The company is shrinking, and while oil is generally cyclical, the same weakness is not being seen in other TSX energy stocks. Finally, MEG’s gotten pricey on a sector-relative basis due to the M&A hype. I’d rather own Suncor than this.
