The resilience of oil companies in an already year-long, low-price environment has continued to shock me. But prices for oil and natural gas that are beneath most companies' breakeven points have to have an effect sometime, no matter what financial tricks and lifelines are extended. That is true even to the most well-run and properly-capitalized companies in the energy space.
There are two fresh indications this morning of a space finally ready to cry uncle -- with the unsolicited takeover bid on Apache Energy (APA) and the entirely solicited offer for sale from Clayton Williams Energy (CWEI)
Both of these news items are almost unnoticed, and both companies are playing down the prospects of being sold. Apache is one of the larger U.S. independents, with a market cap of close to $20 billion. I have preferred other U.S. independents over the last year as takeover targets. But the asset base that Apache controls is arguably one of the best out there with quality acreage in the Permian basin and the Anadarko basin of Oklahoma.
Apache also has a strong presence in the Gulf of Mexico. Overseas assets in Egypt have weighed heavily upon the share price since the Arab Spring and consequent political shifts. But with less than 10% of production operations there, perhaps it was painted with too wide of a negative brush.
But on this takeover bid, nothing is known -- not who made the bid, what the possible premium was or any other details. What we do know from Apache is that it has contracted Goldman Sachs on possible defenses to a hostile action to take over the company.
Is this offer real? You can bet on it -- today's premium of nearly 12% on Apache shares confirms not only that the bid was real, but that the talks are actually proceeding. Goldman may be more of a facilitator in this and less of a defender.
Are the shares worth owning? Not on your life. It's not that Apache isn't worth the premium that might be paid -- it will ultimately be worth far more -- but there are other quality independents that will also offer fantastic assets portfolios without added takeover premiums built in. I'm thinking particularly of Devon (DVN), Hess (HES) and Anadarko (APC) here. The move on Apache is, we hope, the beginning of an avalanche of much needed restructuring in independent U.S. exploration and production companies.
Less so for Clayton Williams. With a very small footprint, albeit in fantastic acreage in the Permian, Clayton has to consider whether it will outlast some others if oil prices remain low for another year. During October, board members at CWEI initiated a review of 'strategic alternatives'. The CEO on his recent conference call revealed that one of these ideas included a sale of the company.
This sidearm approach to finding a suitor has so far been notoriously ineffective, as Whiting Petroleum (WLL) tried just such an approach without success. Instead, shares of Whiting have been decimated -- it's deadly to shareholder confidence to let the markets see your panic.
This makes CWEI, if you are an investor, a full-blown sale right now.
And, if you're an investor in the energy space for the long haul, as I am, you should be a very interested party. The M&A and restructuring activity in U.S. independents is finally starting to heat up -- and that's bullish.