The tie-up between Talisman Energy and Repsol serves as a cautionary tale for would-be acquirers of distressed oil and gas producers, especially with oil prices expected to remain lower for longer over the next few years.
Suncor Energy (TSX: SU, NYSE: SU) certainly received the message. The company won’t pay any cash in its hostile takeover of Canadian Oil Sands (TSX: COS, COSWF) after a slight bump in the exchange rate for the all-stock deal finally convinced Canadian Oil Sands’ management team to cave in and accept the offer. Of course, depressed oil prices and an impending downgrade to Canadian Oil Sands’ credit rating from Moody’s Investors Service made the deal even more enticing.
Canadian Oil Sands’ operating costs often exceed $50 per barrel at its Syncrude joint venture, the asset that generates the preponderance of its earnings. Bondholders likely will be pleased with the deal, as Suncor Energy has a superior Baa1 credit rating and a stable outlook.
The handful of oil and gas producers remaining in our Model Portfolio should survive this down-cycle; our favorites boast high-quality assets and should win market share over the long haul. This relative strength also makes them potential takeover targets for a larger player.
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In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Feb. 25, 2021
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