It might not be quite the strategic manoeuvre shareholders in diversified conglomerate Wesfarmers Ltd (ASX: WES) were expecting, but it appears the group has begun to put its cashed-up balance sheet to work.
According to a Wesfarmers' announcement the group is set to invest US$100 million to acquire a 13.7% stake in the newly established oil and gas player Quadrant Energy. Quadrant, which is also part owned by Macquarie Group Ltd (ASX: MQG) and Brookfield Asset Management, has a footprint of 45 exploration permits and 17 production licenses which cover more than 81,000 square kilometres primarily in the Exmouth and Carnarvon Basins offshore off north Western Australia.
Wesfarmers' decision to invest in Quadrant will no doubt be met with mixed emotions. The group has sold a number of high quality assets over the past couple of years including its insurance business and its industrial gas business.
One of the drags on Wesfarmers' performance in recent years has been its coal division which has faced a headwind from lower prices and negative market sentiment. The move into another commodity business that is also currently facing headwinds may be viewed poorly by some investors; other investors meanwhile will view Wesfarmers' timing as a shrewd move near a cyclical bottom.
Opportunities within the energy sector have been a key theme for billionaire Kerry Stokes whom presumably has also been attracted by possible cyclical lows. Through his investment vehicle Seven Group Holdings Ltd (ASX: SVW) and under the guidance of ex Woodside Petroleum Limited (ASX: WPL) boss Don Voelte AO, Stokes has been an active acquirer of a number of oil and gas assets including taking shareholdings in Beach Energy Ltd (ASX: BPT) and Drillsearch Energy Limited (ASX: DLS).
What should you do?
With a market capitalisation of $45.5 billion, Wesfarmers' investment of $100 million into Quadrant in itself isn't that significant. What would be significant however is if this is the beginning of a larger strategic move by the group into the beaten-up energy sector.
Wesfarmers has a solid track record of creating shareholder value and it's always pleasing to see management focussing on producing an adequate return on shareholder funds. With the stock having underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by around 8% in the past year, now could be an opportune time to take a close look at this blue-chip stock.
