Oil company M&A - the potential targets and punts
Oil stocks have been the flavour of the past few months as M&A fever has taken a progressively tighter grip on the sector.
Burgeoning tension in oil-producing countries, with Iran at its core, is piling pressure on the oil companies to find as much Black Gold as possible, as fast as possible.
This has led some speculators to predict the price of oil could reach the heady heights of $150 per barrel in the months ahead.
Rising oil prices have caused the value of the so-called Supermajors (BP (BP.), Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell (RDSB), Total (TTA) and ConocoPhillips (COP)) to go up anything between 5% and 12% in the past year.
Investors increasingly believe the quickest route to more oil is through acquisition of minnows.
This is largely because the top oil companies only control a not-so-super 6% of the world's oil and gas resource. The rest is by-and-large under the control of the rather more spicy parts of the political world such as Iran, Iraq, Venezuela, Qatar and Saudi Arabia.
So, as Iran controls an estimated 17% of the world's oil reserves, and there is talk of air strikes on their shiny new nuclear facilities, trade embargos (European embargo from 1 July) and the closure of the Strait of Hormuz, the oil price is naturally only going to do one thing... go up.
Couple that with the growth of emerging markets and the current absence of Libyan oil and you have the perfect storm for sharp price spikes, even though the spikes themselves will ultimately slow growth.
Regardless of all the clever new ways to extract the black stuff, a spike will arguably bring about an abrupt end to the US-led global rally in equities, which recently saw a return to 2008 levels. The US relies on 60% of its oil from foreign markets and consumes 20% of everything that is produced.
Furthermore, as 70% of the futures market for oil is controlled by speculators, no matter what political pandering, the USA's thirst for oil is well-documented and the market price will be dictated to it, not by it.
Also, if more and more countries turn their back on Iran we do not know if the West's allies in Saudi Arabia will have the capacity to meet demand.
So, where to look for potential investments in companies that have found oil and may attract a bid in the current climate?
Let's first be clear, it doesn't come without risk. Bowleven (BLVN) investors found out only this week that all bids do not necessarily lead to a takeover. Dragon Oil (DGO) came sniffing around but didn't bite, leaving investors staring into the smoke of a 30% loss in five minutes.
On the other hand, if the temptation to get involved is just too overwhelming, do your homework, so you're not left wearing the blindfold and pinning the tail on the donkey.
Remember, M&A activity attracts all the spivs so be careful what you read and take bulletin board comments with a pinch of salt - as if you were hearing it from a man in a pub.
Pick stocks that are fundamentally sound and preferably have some of the black stuff already.
Alternatively, for the gamblers out there, you can have a riskier punt.
Here are some of my ideas:
Gulf Keystone Petroleum (GKP) - 350p - Solid well, updates and rumours Exxon may be interested in an acquisition in the area. Investors appear to be bullish on more imminent drilling updates.
Circle Oil (COP) - 24p - Performing well. Recently upgraded recoverable reserves where it has licences by 30%.
Xcite Energy (XEL) - 135p - Recently upgraded estimates for the potential of its Bentley oil field in the North Sea. Analysts say extraction will be complicated although they do expect further output upgrades to come.
Victoria Oil and Gas (VOG) - 3.7p - Production in Cameroon bearing fruit and looking to other ventures.
Fancy a punt?
Bowleven (BLVN) - 95p - Recently got hammered on the back of a failed bid approach by Dragon Oil. There have been concerns over the company's ability to raise funds to continue operations in the past but there are other firms in the area who could replace Dragon as a potential suitor.
Gold Oil () - 4p - Market awaits positive news from its next Columbian drilling update.
Nighthawk Energy (HAWK) - 4.6p - Announced a work-over programme on existing wells in Colorado and planning five new wells this year.
Aurelian Oil and Gas (AUL) - 20p - Actively looking for a buyer and announcing a license extension in Poland could well help it find one.
Leni Gas and Oil (LGO) - 1.68p - The market appears to be optimistic over operations in the Gulf of Mexico.
Max Petroleum () - 13.5p - Hampered by all sorts of weather problems affecting drilling operations in Kazakhstan, but investors remain optimistic
For the record I do not own any shares in the aforementioned companies and do not plan to in the coming month. Good luck out there.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|ROYAL DUTCH SHELL||2,334.50p||-1.54%|
|GULF KEYSTONE PETROLEUM LTD||133.00p||-1.48%|
|VICTORIA OIL & GAS||34.88p||0.36%|
|EXXON MOBIL CORP||$87.36||1.17%|
|All data 15min delayed as of: 23:30:58 17/01/17|