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Oil and gas companies merging due to strong outlook

Within the past month two merger and acquisition moves in the energy sector have been announced. This may indicate further consolidation in the oil and gas industry as well as in gas utilities. The oil and gas industry is seen to be pulling ahead of mining over the next two years as the burgeoning LNG story unfolds.

Usually when an industry is beginning to rise in either a cyclical or secular market move, companies begin mergers and takeovers of other companies to take advantage of higher expected earnings. Companies have to move early and quickly, before their takeover or merger targets become too pricey themselves. That’s why you can detect a rush of deals when an industry is in a cyclical upturn.

In the gas and oil industry, Senex Energy (ASX: SXY) just proposed a $752 million takeover of AWE (ASX: AWE), which valued AWE at $1.44 a share, in contrast to its $1.27 closing price at the time of the announcement. AWE revealed the details of the offer and then promptly rejected it. Some analysts have valued AWE at around $2 a share, and the company’s book value per share is $1.70, so AWE is seeing this as an opportunistic bid without enough premium.

Senex in turn pulled the offer almost as quickly as they announced it. However, like a jilted suitor, it may not go far, and there is always the chance that it may sweeten the offer. Yet as we have seen in other takeover bids, the initial offer may persuade other competitors to throw their hat in the ring and start a bidding war. Watch this space for potentially more action.

In the related gas utilities sphere, APA Group (ASX: APA), a natural gas infrastructure business, has finalised a scheme of arrangement with Envestra (ASX: ENV) to merge.

The scheme was first proposed back in July this year, but was politely turned down at the time. However, after further negotiations, a cash and scrip deal was agreed, with the implied value of Envestra’s shares at $1.17 based on a weighted average APA Group share price of $6.09. Envestra’s shares went up to about $1.10 after the initial proposal, at yesterday’s close it was $1.14. APA’s share price has been flat around $6 since July.

Foolish takeaway

By learning the cycle of how mergers and acquisitions occur, investors can spot when industries are beginning an upturn. Like individuals, companies may not want to buy other companies as much when the market is headed down because the true bottom is still unknown.

Once a trough has been established, and the trend starts to turn up, the various strategic plans and buyout scenarios are reassessed to see where a company can add “bolt-on” acquisition growth. The stronger and more profitable companies often have the advantage as first movers. They may be able to pick-up other businesses while they are still relatively cheap, compared to the expected earnings growth.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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