Oil plunge presents a buying opportunity in the sector’s downtrodden stocks

by Tom Sieber

The recommended $867 million offer for First Calgary Petroleums (FPL:AIM) from Italian giant ENI should presage further merger and acquisition activity in the Aim oil & gas universe. Recent price weakness in the sector means it is now significantly cheaper to buy companies than it is to acquire assets. Those firms with what broker Fox Davies Capital describes as ‘very material resources’ are most likely to be targeted.

Potential bid candidates include West African-focused Afren (AFR:AIM) since the £398 million market cap is some 50% off its 12-month highs at 90p; Regal Petroleum (RPT:AIM), which at 136p is worth less than half what it was earlier in the summer and is developing significant reserves in the Ukraine; £211 million market cap Gulfsands Petroleum (GPX:AIM), 20% off its year high and developing the Khubert East project in Syria; and Canadian-based and Albanian-focused Bankers Petroleum (BNK:AIM), which has fallen nearly 80% to 217p since June.

All of this quartet have proved and probable reserves in the tens of millions of barrels. A number of them have had to contend with specific issues beyond a falling oil price but their downtrodden valuations mean it is possible to make strong investment cases for all of them, even without the prospect of a bid.

Analyst Tim Heeley at broker Daniel Stewart (DAN:AIM) indicates ENI’s bid for First Calgary’s assets comes in at a level lower than the valuation set by the independent auditors’ competent persons report (CPR) on the company at the end of 2004, when the oil price was just $40 a barrel. ‘The market is valuing the assets at half the value as determined by the current CPR,’ Heeley adds.

It would take a spectacular failure of nerve on the part of the companies with ready cash not to do deals in the current climate, although one obstacle, as Premier Oil (PMO) chief executive Simon Lockett observed recently, has been the over-extended and volatile oil price, which has made settling on valuations particularly difficult.

Shares says: Buy Afren, Regal Petroleum, Gulfsands Petroleum and Bankers Petroleum