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3 reasons Drillsearch is a potential takeover target

As oil and gas production from the Cooper Basin heats up, niche operator Drillsearch (ASX: DLS) is one company that could be seen as a takeover target. There are three factors which make Drillsearch an attractive prospect.

1. A history of increasing value for shareholders

The ability to increase value for shareholder makes a company attractive to potential suitors who are out to maximise their own return and deliver growth.

Drillsearch had a stand-out result for 2013, earning a record net profit after tax (NPAT) of $45 million and catapulting sales revenue by 356%. Total production was up in excess of 150% and forecasts for FY14 are a further doubling of production from 1.1 million barrels of oil equivalent (mmobe), to 2.3-2.5 mmobe.

Though Drillsearch itself admits this is short-term focused growth, it is a strategic decision to fund longer-term growth projects, in particular wet gas production which can be more capital intensive than oil. New partnerships with bigger energy companies including Santos (ASX: STO) and Beach Energy (ASX: BPT) create additional value, leveraging their expertise and capabilities.

2. Valuable resources

Drillsearch is a standout both for its existing production and the potential growth in its wet gas assets in a strategic location. The company is a niche energy producer solely focused on the Cooper Basin, where it holds 18,000 square km of acreage.

The Cooper Basin is seen by many energy companies as a region of significant value because existing infrastructure in the area makes commercialising oil and gas discoveries low cost and low risk. The basin’s proximity to Australia’s east coast, particularly New South Wales, is also highly prized for the significant increase in gas demand forecast for the coming decade.

3. Clean capital structure

Drillsearch has a relatively clean capital structure with $104 million of debt and a working capital facility of $50 million with Commonwealth Bank (ASX: CBA). On top of this, the company has US$125 million of outstanding convertible notes, were issued in May this year with a five-year term.

A clean capital structure makes the due diligence process much easier for a potential buyer and lowers the risk of nasty surprises down the track. A company borrowing money from dodgy lenders, or with various levels of preferred shares adds complication and risk.

Foolish takeaway

Drillsearch is a company with strong growth prospects, valuable assets and relatively clean capital structure. These factors, in addition to the company’s solid management team, could see the company become a target for a big energy company hungry for growth in the Cooper Basin.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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