Oil Sector Flush with Cash, Expect M&A - Canaccord Analyst

by: FP Trading Desk November 21, 2008 | about stocks: BP / COP / NXY / SU    

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Oil companies are flush with cash thanks to the recent period of high energy prices. At the same time, reinvestment in their core business has lagged. This could put Calgary in the middle of a consolidation wave for the sector.

The world’s top five oil companies finished the third quarter with C$62-billion in cash and annual cash flow of C$232-billion, according to Canaccord Adams. As a result, it expects an increased focus on M&A in the coming year. Canada and the oil sands in particular, could get a lot of attention since it offers meaningful reserve and production growth in a reasonably stable fiscal environment.

Canaccord noted that the market capitalization of large-cap energy companies in Canada has declined more than 50% since peaking in July.

Canaccord said:

We believe that major oil companies look beyond the short-term environment, particularly for assets, such as oil sands that have a 40+ year reserve life. There will most likely be several bull market cycles for energy over that time period.

Canaccord thinks Suncor Energy Inc. (SU), EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ), Talisman Energy Inc. (TLM) and Nexen Inc. (NXY) are all vulnerable to an unsolicited takeover offer. It listed ExxonMobil Corp. (XOM), Royal Dutch Shell plc (RDS.A), Total S.A. (TOT) and Chevron Corp. (CVX) as potential suitors for Suncor. Their reserves declined 7% in 2007, while production fell 2%, Canaccord noted. These oil giants are also debt free and have generated $52-billion of free cash flow year-to-date.

Suncor, meanwhile, is considered by many to be a best-in-class producer, particularly in the oil sands. It offers 2009 production of 350,000 barrels per day, oil sands at less than C$2 per barrel and a market cap near June 2005 levels.

Likely acquirers for Nexen include BP plc (BP), ConocoPhillips (COP), Eni S.P.A. (E) and Total S.A., Canaccord said, noting that they would all be interested in its Long Lake oil sands assets.

BP and Conoco could also be after Nexen’s unconventional coal bed methane and Horn River shale gas plays. Meanwhile, BP, Eni and Total would be interested in Nexen’s North Sea assets, particularly the Buzzard oil field.

Nexen offers a diversified portfolio with a long lifespan, free cash flow of C$1.5-billion annually on production of 250,000 barrels of oil equivalent per day, Canaccord noted. It is also trading near its June 2005 levels.

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This article has 4 comments:

  •  
    Nov 21 09:59 AM
    I've been expecting that for a while now, but so far not much activity. I also expect many of these cash rich oil companies to begin to buy smaller alternative energy outfits as well.
    Reply | Link to Comment
  •  
    Nov 21 12:37 PM
    omg, this site is relentless about hoping for commodity names. integrateds have been around for almost centuries now...and that for good reason. They don't make crazy assumptions, esp. given the crazy nature of crude. $49 of oil is historically extremely expensive. Integrateds know this. So why would they pay for an incompetent company that can't manage when oil falls below $60 now, rather than wait until oil hits $30 and it goes out of business...just buy it from the Ch 11 judges.

    It was a bubble folks...time to move on.
    Reply | Link to Comment
  •  
    Nov 27 10:26 AM
    HAHAHA 30$ oil... What an irrational investor, I'm guessing he was the first one to call oil at 250$ when it was trading at 140$ + ...

    By the way, the integrated companies know the long term equilibrium price should be more towards 100-120$ in real dollars, just as the International Energy Agency mentioned in their study. BrotherMaynard, if you know more than the IEA, please tell us how you got this good and why you are not CEO or on the board of any of the big energy companies!

    As Warren Buffett says, better to buy a great company at a good price than an average company at a great price. The great names in Oil Sands (Suncor, Canadian Natural Resources and Encana) would fit in the former category, so the big guys in Energy are likely shopping around as we speak in order to boost their growth prospects.

    As for your ''Time to move on'' statement, most of us are actually WORKING in this sector, so this is our job, we are not ''moving on'' to the next ''hot sector'' as I'm sure you already have done. We actually study the fundamentals, not what Roubini or Cramer are saying.

    Disclaimer: I own Suncor shares



    On Nov 21 12:37 PM BrotherMaynard wrote:

    > omg, this site is relentless about hoping for commodity names. integrateds
    > have been around for almost centuries now...and that for good reason.
    > They don't make crazy assumptions, esp. given the crazy nature of
    > crude. $49 of oil is historically extremely expensive. Integrateds
    > know this. So why would they pay for an incompetent company that
    > can't manage when oil falls below $60 now, rather than wait until
    > oil hits $30 and it goes out of business...just buy it from the Ch
    > 11 judges.
    >
    > It was a bubble folks...time to move on.
    Reply | Link to Comment
  •  
    Nov 28 11:40 AM
    Rather than rely on a completely random variable such as oil prices, why not model for the worst? All I ever read on this site is how oil is going to triple digits right quick. But what if that doesn't happen? What If a company can't operate at $30bbl? If thats the case you shouldnt own it any more than you should go to the casino. That thought process is about as rational as it gets.

    The EIA is required to make guesses. They're obviously no better than the next guy as they were about 50% off the mark this time around. It's irrational to believe that the EIA or anyone else for that matter can divine what the price of oil will be in the future.

    For instance:

    "As a result of the sputtering economy and lower petroleum demand, the price for the U.S. benchmark West Texas Intermediate oil will average $63.50 a barrel next year, the EIA said."

    www.reuters.com/articl...







    On Nov 27 10:26 AM jayjayjay1212 wrote:

    > HAHAHA 30$ oil... What an irrational investor, I'm guessing he was
    > the first one to call oil at 250$ when it was trading at 140$ + ...
    >
    >
    > By the way, the integrated companies know the long term equilibrium
    > price should be more towards 100-120$ in real dollars, just as the
    > International Energy Agency mentioned in their study. BrotherMaynard,
    > if you know more than the IEA, please tell us how you got this good
    > and why you are not CEO or on the board of any of the big energy
    > companies!
    >
    > As Warren Buffett says, better to buy a great company at a good price
    > than an average company at a great price. The great names in Oil
    > Sands (Suncor, Canadian Natural Resources and Encana) would fit in
    > the former category, so the big guys in Energy are likely shopping
    > around as we speak in order to boost their growth prospects.
    >
    > As for your ''Time to move on'' statement, most of us are actually
    > WORKING in this sector, so this is our job, we are not ''moving on''
    > to the next ''hot sector'' as I'm sure you already have done. We
    > actually study the fundamentals, not what Roubini or Cramer are saying.
    >
    >
    > Disclaimer: I own Suncor shares
    >
    Reply | Link to Comment
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