Are shares in oil and gas company AWE Limited significantly undervalued?

Shares in mid-tier oil and gas producer AWE Limited (ASX: AWE) jumped as much as 9% yesterday after the company rejected an offer proposed by Senex Energy (ASX: SXY) to merge the two companies.

The friendly merger proposal would have seen Senex combine its considerable Cooper Basin oil and gas assets with AWE’s portfolio of energy assets across Western Australia, New Zealand and Indonesia to form a company worth a healthy $1.5 billion.

Senex has achieved considerable growth in its own stand-alone production of oil in the last three years. For the 2013 financial year the company increased oil production almost eight-fold, while 2P reserves were increased 575%, however the addition of AWE was seen as a good fit according to Senex CEO Ian Davies.

AWE has ties to major energy operators Santos (STO) and Origin Energy (ASX: ORG) which were likely part of the attraction for Senex. It has said it plans to bring in a larger operator to help develop its shale gas deposits when the time is right.

However the board of AWE determined that the merger would not be in the best interests of its shareholders, saying that, “the offer significantly undervalued AWE shares”. The board also noted that under the proposal AWE would contribute a substantially greater share of 2P reserves (70%), total production (80%) and sales revenue (67%), but would only receive 47% of the merged group equity.

AWE is targeting a doubling of its production and a tripling of cashflow by 2017 and in its 2013 AGM presentation cited a Bloomberg report that suggested AWE is the cheapest relative to its peers using Enterprise Value / 2P reserves ratio.

Foolish takeaway

The merger proposal is positive for both companies. For AWE it reaffirms the potential value other market players see in its shares, while for Senex shareholders it proves that management are actively on the lookout for new growth opportunities where it can create efficiencies at a good price.

Want to make money from oil and gas?

Limited oil supply and growing demand mean oil prices are likely to rise over time. Position yourself to profit from this trend now, with The Motley Fool’s brand-new FREE research report, “3 Oil Stocks to Send Your Portfolio Gushing Higher”.

Motley Fool contributor Regan Pearson owns shares in Senex Energy.

5 ASX Stocks for Building Wealth After 50

I just read that Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday.

It just goes to show you… it’s never too late to start securing your financial future.

And Motley Fool Chief Investment Advisor Scott Phillips just released a brand-new report that reveals five of our favourite ASX stocks for building wealth after 50.

– Each company boasts strong growth prospects over the next 3 to 5 years…

– Most importantly each pays a generous dividend, fully franked.

Simply click here to find out how you can claim your FREE copy of “5 ASX Stocks for Building Wealth After 50.”

See the stocks now