General | Feb 05 2006
If you thought 2006 was already shaping up as the year of the takeover then hold on, as in ABN Amro’s view there is more in store, with the oil and gas sector in particular offering the prospect of a number of additional deals.
As the broker notes the first few months of this year have seen a number of deals, ranging from Australian Gas Light’s (AGL) entry into the PNG gas pipeline project to Anzon (AZA) bidding for Nexus Energy (NXS).
In its view conditions favour further activity, as organic growth opportunities are becoming more difficult to find and the costs of developing such discoveries are rising, meaning in many cases it is cheaper to buy growth rather than find new reserves.
Supporting such an approach is the fact producers are receiving high prices for their output, meaning cash flows are high and companies have money available to spend on acquisitions designed to add to reserves. The broker notes this is becoming a greater factor as companies adjust their longer-term oil price forecasts up, which has an impact on asset valuations and the economics of both new projects and acquisitions.
Focusing on the Australian market the broker selects the two dominant players, Woodside (WPL) and Santos (STO) as the most likely to be buyers in the current environment. In the case of the former it suggests there is reason to believe expansion of its assets in the US and particularly the Gulf of Mexico remains an objective, while for Santos it suggests the company could benefit by replacing declining reserves and solidifying its positions in a number of basins where it currently has operations.
At the junior end of the market it suggests Tap Oil (TAP) is a likely potential buyer of assets as it is faced with declining reserves, while Australian Worldwide Exploration (AWE) may look to continue expanding its interests in Asia and Indonesia. Of interest, the broker also rates AWE highly as a prospective target given it has a sizable reserve base.
Other potential targets the broker includes Oil Search (OSH) for its exposure to gas operations in Papua New Guinea and Roc Oil (ROC) given the company has a number of new projects coming on stream over the next year.
Tap is a less attractive target in the broker’s view given its declining reserve position, while the attractions of Hardman Resources (HDR) are seen as more limited given ongoing issues with its Tiof field and Mauritania assets.
Of the companies mentioned only Australian Worldwide Exploration is rated as Buy by the broker, the other companies all being assessed Hold ratings at current levels. The market generally has a favourable bias towards AWE, the FN Arena database showing another six stockbrokers and equity researchers cover the stock, with three Buy ratings and three Hold recommendations.
