Oil Sands M&A

on Mar 03 in Financial Market, Oil Market tagged by Trevor Hicks

Here’s a Forbes report from a few days ago about a hostile takeover bid Total made in January for oil sands company UTS Energy.  There are a variety of strategic reasons for this target for Total including proximity to its existing acreage and its partnership with Petro-Canada.  But what I find most interesting is the purely financial aspect of the proposal as it relates to my post yesterday about oil industry takeovers.

I don’t pretend to know all the details about this firm, but before the takeover bid it was trading at about 0.5 to book value despite having very little debt and indeed it was trading for about the value of its cash and receivables.  This is why Total made an offer for the stock, why bother trying to buy the assets when the stock is actually cheaper?  This ties in to my point yesterday that the equities in the oil industry are so incredibly beaten down right now that you almost have to be a buyer if you are a player in the industry and have cash.

It’s no surprise that the board of UTS doesn’t want to take the deal, they know perfectly well that the long term value of the firm is probably much higher than the price Total has offered even though it doubled the stock price.  But by taking the offer to the shareholding public, Total has taken the board out of the decision and the equity holders who might be happy to double their money.  It will be interesting to see how this plays out and whether the firm stays independent, is bought by Total or accepts a rival bid.

Equity is cheap, cash is king.