I told the editor of Wealth Daily I wasn’t going to write about oil again. After all, how many times can you say, “Yes, oil prices are crushed, but there is going to be a buying opportunity soon?”
But when the fifth-biggest oil company in Canada is on the verge of being bought out… well, it suggests the time for bottom fishing in oil stocks may be close at hand.
Back in August, Spain’s Repsol was in talks to buy Talisman Energy (NYSE: TLM). Repsol is flush with cash, reported at around $10 billion. And it wants to add North American oil and natural gas assets.
Unfortunately, Talisman was trading around $10 a share in August, and a deal would’ve had to value Talisman around $15 billion, or $15 a share.
But now, Talisman is trading around $5 a share. And Repsol thinks it can get a deal done around $6 to $8 a share. That would value Talisman as high as $8 billion, roughly half of what Repsol would’ve had to pay just a few months ago.
Talisman has some nice assets in the U.S. It’s got 60,000 acres in the Eagle Ford, which is among the lowest-cost oil fields in America right now. It also has 190,000 acres in the natural gas-rich Marcellus.
In Canada, Talisman has huge acreage positions in the Chauvin, Duvernay, and Greater Edson. These Canadian land positions have a lot of oil in the ground, but development has not proceeded at the pace of the company’s Eagle Ford operations.
And then there are attractive assets in Colombia, too.
All told, Talisman gets ~50% of its revenue from North American operations. Assets in Asia (Malaysia, Indonesia, and Vietnam) account for around 40% of its total production. Its North Sea wells are in decline and aren’t worth discussion.
It’s not so much Talisman’s assets that I find interesting — it’s the fact that Repsol wants to acquire the company. You don’t do that if you think oil prices will head much lower…
Buy, Buy, Buy
Mergers and acquisitions are always considered bullish. Either the future looks good enough that companies want to quickly add assets in order to take advantage of more demand and higher price, or the asset price has fallen to the point where it is irresistible.
I think it’s pretty obvious that, in this case, Repsol thinks oil prices have fallen to the point where it is now attractive. And it wants to buy.
Talisman, on the other hand, has a decent amount of debt. It would likely have to cut its 7% dividend to maintain profitability. Shareholders probably wouldn’t like that, so sometimes it just makes sense to sell out at a nice premium and move on…
If this acquisition is completed, it’s not likely to have a huge impact on oil prices. Demand for oil and production levels are pretty much set, unless OPEC decides it’s time to cut production and support prices.
But as I wrote last week, that’s not likely to happen for another month or two. It should be clear that Saudi Arabia wants to throw its weight around a little. It can reassert its dominance in OPEC as other countries struggle to fill budget gaps.
In another month, Venezuela and Nigeria will be begging the Saudis for a production cut…
And if Saudi Arabia can drive some marginal American shale companies out of business, all the better for them.
Repsol’s move to take out Talisman may signal that a bottom is in for oil stocks, and as investors, we should be paying attention.
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Double-Digit Gains
Last Friday, Talisman ramped up over 30% on the news that it was in buyout negotiations with Repsol.
The stock is now above where it was on November 28, the day after Saudi Arabia surprised the world by refusing to cut OPEC oil production.
And if this deal gets consummated at $8, it will push Talisman shares back to where they were in September and around 35% from 52-week highs. Right now, shares are 55% from those highs. So this deal is going to save the company a bundle.
Interestingly, Talisman says it has been approached by “a number of parties” who either want to buy some assets from the company or buy the company as a whole. It’s not likely these “parties” will simply give up if they don’t get Talisman. They will look for other companies to buy.
And that means there are other stocks out there that could make 30% to 50% gains on a buyout offer.
That’s plenty of incentive to get investors buying oil stocks, thereby putting a floor under prices.
But which stocks to buy? Easy: You want to buy profitable American or Canadian producers with market caps between $1 and $5 billion… and not too much debt, please.
One company I mentioned last week — Oasis Petroleum (NYSE: OAS) — is a good candidate. At $1.5 billion, Carrizo Oil & Gas (NASDAQ: CRZO) is another.
Denbury Resources (NYSE: DNR), Diamondback Energy (NASDAQ: FANG), and Canada’s Enerplus (NYSE: ERF) are attractive, as is Permian Basin driller Laredo Petroleum (NYSE: LPI). QEP Resources (NYSE: QEP) and Whiting (NYSE: WLL) also look good.
Those are my top eight buyout candidates. They are all profitable and have reasonable P/E ratios.
We’ll see what happens, but we should see more buyouts over the next few weeks.
Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
