Why Horizon Oil Ltd sank more than 6% today

Energy company Horizon Oil Ltd (ASX: HZN) saw its shares sink more than 6% today, after a third party announced a takeover bid for Roc Oil Company Limited (ASX: ROC).

Horizon and Roc had proposed an $800 million merger of the two oil and gas companies, but today Roc announced that it had received a confidential, unsolicited, indicative and incomplete takeover approach from an unnamed party.

Investors obviously fear that the prospect of Roc being taken over rather than merge with Horizon has increased, and all the benefits of the combined entity will be lost to Horizon shareholders. On the other hand, Roc’s shares rose 4.5% as the prospect of a better deal for the shareholders becomes more likely.

The combined group would have a market cap of around $800 million, with contingent resources of 120 million barrels of oil equivalent (mmboe). Annual production (predominantly oil) would be around 5.5 mmboe, with assets across China, Papua New Guinea, Malaysia Myanmar as well as Australia/New Zealand.

Roc Oil currently holds around US$88 million in cash (and no debt), which equates to around 12.8 US cents of cash per share – with shares currently trading at 59 cents.

It’s not yet clear who the third party is who has initiated the takeover proposal for Roc, but it could be another of Australia’s medium-sized oil and gas producers such as AWE Limited (ASX: AWE), Beach Energy Limited (ASX: BPT) or Senex Energy Ltd (ASX: SXY).

You also couldn’t rule out Woodside Petroleum Limited (ASX: WPL), which has relatively few development projects on the horizon (pun intended). Another potential bidder could be private equity, in conjunction with one of Roc’s largest shareholders, fund manager Allan Gray, which controls a 19% stake in the company. Allan Gray’s Simon Marais has been highly critical of the deal, calling it “fundamentally unfair”.

There’s not much Horizon shareholders can do now, but sit and wait for more details.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga