Interactive Investor

These oil stocks are potential bid targets

8th April 2015 14:57

Lee Wild from interactive investor

It was only a matter of time before BG Group fell to a takeover approach. Actually, City watchers have been predicting this event since the oil assets of British Gas were split from the residential gas business (now Centrica) in 2000. But is this the beginning of a sector-wide consolidation, or an opportunist bid for a perennial bid favourite?

Well, the consensus is that a flurry of takeovers similar to those that took place in the late-1990s is unlikely. With oil prices having plunged to just $10 a barrel, Exxon bought Mobil, BP splashed out $48 billion on Amoco, and French titan Total bought Petrofina and Elf.

However, it may not be so easy to get many mega-deals past the regulators this time round.

"Shell does not have a great record of success in M&A and we are not convinced that this unleashes a wave of M&A amongst the big players," says Westhouse Securities. "Anti-trust issues will prevent the bigger players combining."

But there are plenty more fish in the sea and investors are advised to look further down the food chain for bid action.

"M&A is necessary amongst the mid-sized and smaller players, particularly in the E&P sector and would highlight Tullow Oil (West and East Africa), Ophir Energy (East African gas), Dragon Oil (massive cash balance), Genel Energy (Kurdistan) and SOCO International (SE Asia) as probably the top five candidates amongst UK listed players," writes Westhouse.

"Consolidation also needs to occur amongst the smaller players as there are too many sub-scale, poorly funded, single asset/country companies listed on public markets."

Here, the broker highlights North Sea explorers Faroe Petroleum, Ithaca Energy and Parkmead, as well as Rockhopper Exploration, Bowleven, Circle Oil, Lekoil and Chariot Oil & Gas, "all candidates for takeover given their depressed valuations relative to their portfolios".

Clearly, the market agrees, and share prices are already reflecting heightened bid speculation.

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.