Whenever an industry starts to cave in, talk of consolidation and takeovers rises and fairly so. If you saw something you've had your eye on for a long time suddenly drop in price 20%, 30%, even 40%, you'd want to snap it up.
Companies are no different. They watch competitors and size them up if the price is right.
In the US, the oil industry is being shaken up from plummeting oil prices. The great expansion of shale oil there plus OPEC being unwilling to cut production to boost prices has now sent Brent crude to under $70 from $115 since June, about 40% down. Already takeovers are starting and if oil keeps on dropping to the $50 – $60 range, more buyout opportunities are in store.
Same goes for Australia. A number of foreign companies like Apache Corporation (NYSE: APA) want to pull out of Australian projects and focus on their US assets. This could be the chance that Woodside Petroleum Limited (ASX: WPL) is looking for since they are on the acquisition trail. Apache's stakes in the Gorgon and Wheatstone LNG projects may be up on the block soon and Woodside is considered a frontrunner in buying them.
But what Australian companies may be looking like takeover targets?
One could be Santos Ltd (ASX: STO). It does have a good revenue generating stake in the PNG LNG which began LNG exports this year, but the biggie is the GLNG LNG project that should start production around mid-2015.
Once the GLNG starts, revenue should jump up, yet with a sudden oil price drop, how will that affect earnings and margins? Also, Santos is in the situation where the GLNG has difficulty sourcing all the gas it needs for contracted exports. More the fault of very high production costs in Australia, it may weigh on the company's prospects just when overseas oil price woes pressure the business.
Santos's share price is down from about $15 in September to $8.40 now- about 44% down. That could make it a much more attractive target. The stock yields a healthy 4.2% fully franked.
Other companies that may be in the spotlight are Cooper Basin regional players like Beach Energy Ltd (ASX: BPT) and Senex Energy Ltd (ASX: SXY). Both are producing more on the back of new discoveries, but could have their revenues affected. Both are down 45% and 57% respectively in share price.
Woodside is cashed up and ready to do deals. With a strong balance sheet and the need for more projects in its pipeline, investors should watch what opportunities it may take in the near future. Its stock is down, but in cyclical commodity markets the lowest cost producers with the deepest pockets usually win out. The stock pays a huge 6.6% fully franked yield, so that would be great dividend income to get while interest rates are at record lows. It is a good long-term buy.
