CALGARY – Analysts are expecting weak oil prices to lead to a flurry of mergers and acquisitions in the oilpatch, with Talisman Energy Inc. (TSX:TLM) the latest subject of takeover speculation.
Shares in Calgary-based Talisman closed up more than 18 per cent on the Toronto Stock Exchange on Friday at $5.04 a share on reports it could soon be taken over by Spanish energy firm Repsol. Earlier in the day, they surged as much as 40 per cent from Thursday’s close.
The Financial Times says Repsol and Talisman are having talks in Calgary and aim to agree on a deal before Christmas. According to the report, the acquisition price would be between $6 and $8 per share, marking a rich premium over Talisman’s $4.26 closing price on Thursday.
Talisman, with operations spanning the world, has been a perennial subject of takeover talk, but so far none of the rumours has borne out. It acknowledged this week that it had been approached by Repsol and others about unspecified deals but added it wouldn’t comment on speculation and that there was no assurance a transaction would happen.
However, Edward Jones analyst Lanny Pendill said a Talisman takeover might actually pan out this time because it’s such a bargain.
As of Thursday’s close, Talisman’s shares were down by about two-thirds from mid-summer.
“I would say the chances now are better now than they ever have been simply because the market cap of the company has gotten so low,” Pendill said.
While Talisman’s North American shale and Southeast Asian operations might be enticing to a potential buyer, its offshore assets in the North Sea have been prone to unplanned outages and have struggled to meet output targets.
“Obviously the North Sea assets are the Achilles heel here and that could be a stumbling block, but that may have been more of an issue when the stock was at $10-$11,” said Pendill.
“Now that the stock is trading at $4, I think a lot of companies out there might be more willing to deal with the North Sea for a short-term period of time because they’re getting the rest of the assets potentially at a bargain price.”
Oil was below US$58 a barrel on Friday, down around 45 per cent since mid-year.
Pendill predicts more merger and acquisition activity across the oilpatch as companies come under pressure.
“I think you’re definitely going to see it among the smaller, more junior type of names that are more highly levered and may not have many options or flexibility,” he said.
“So we view those as forced sellers and when you see a big downturn like you’re seeing now, that’s when you can expect the consolidation to pick up.”
Scott Smith, market analyst with Cambridge Mercantile Group, says after a lull, more deals are on the horizon.
“When we got down to around the US$75-, US$80-a-barrel range, it was very quiet in Calgary and people were sort of waiting on the sidelines to see what the fallout from everything would be,” he said.
Now, it’s a buyer’s market. Firms that may have been able to drive a hard bargain with a potential acquirer a few months ago are on weaker footing now if their balance sheets aren’t in good shape, said Smith.
“They probably don’t have too much time left to hold out for a better valuation.”
Barry Munro, who heads up professional services firm EY’s Canadian oil and gas practice, agrees the oilpatch is in for a period of heightened mergers and acquisition activity.
But he said it’s not something potential are buyers taking lightly. Deciding whether to pounce on an opportunity or to hunker down and conserve cash poses a “conundrum” for many.
“That’s a very tough decision for board members or management to make because if you’re wrong, you can imperil your company,” Munro said.
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