The North American oil and gas market is ripe for mergers and acquisitions. Statoil's (NYS: STO) $4.4 billion acquisition of Brigham Exploration (NAS: BEXP) has just confirmed that. Thanks to the booming shale plays, the exploration and production segment has been developing at a pace not seen in recent years.
So lucrative has been the market that foreign majors are now simply looking to gain a foothold in the industry by buying up companies that have the potential to become leading producers of oil and natural gas. I expect such M&A activity to continue over the next six to 12 months. There are solid reasons for this and investors of small- and mid-cap E&P stocks must keep their ears and eyes open.
The economic slowdown and fears of a double-dip recession have reflected on commodity prices in the last two months. While the underlying business models of energy companies have remained solid, investors have pulled out money without any real reason, making these stocks much cheaper. And this has made the acquiring companies salivate.
A case in point: Statoil paid $36.50 a share for Brigham -- which is a 34% premium over the average trading price for the previous 30-day period -- and yet a good 3.6% below the 52-week high. This is where these super-major companies see opportunity. And by super-majors, I don't necessarily mean companies from the oil and gas industry -- as was the case of BHP Billiton's (NYS: BHP) acquisition of Petrohawk Energy. That's how lucrative the market is.
With Statoil's acquisition, I can't resist but speculate about what Big Oil companies and other European oil majors have up their sleeves in order to take advantage of the current situation. For example, French giant Total (NYS: TOT) already has its presence in the Barnett shale through a $2.25 billion joint venture with Chesapeake (NYS: CHK) . A consolidation leading to an acquisition won't be too surprising. ExxonMobil has already voiced interest in more acquisitions in July.
Fellow Fool and energy editor Dan Dzombak had spoken about why some companies are more attractive than others. In terms of production, more weight is given to producers that have been transitioning from natural gas to liquids. Additionally, when the cost of production of natural gas has been significantly below the trading price, the company should see a growth in profits. So which of the companies fit the bill?
Samson Oil & Gas (ASE: SSN)
Increased production in the Bakken shale and higher price realizations ensured fantastic growth for this small cap. Revenues grew 106% to $5.9 million in the last fiscal year. Samson has focused more on liquids with oil production up by 106% to 64,000 barrels of oil. With more than 90% of existing reserves already developed, future cost of development should be a problem. Additionally, the company's recent success in the promising Niobrara shale should fuel growth for the next few years. With a healthy cash balance of $58 million, it leaves ample room for further expansion. In short, this company's properties are on the sweet spots.
However, what's more interesting is the stock's current valuation. It's probably the cheapest Bakken stock with a price-to-book ratio of 2.8. And with no debt to show on its balance sheet, the valuation looks very attractive.
Add Samson Oil & Gas to your watchlist.
SandRidge Energy (NYS: SD)
The company's strategy to spend heavily on its drilling projects might not look too attractive now. But once production starts picking up -- which I'll put my money on -- things will start looking attractive. The second quarter saw a 106% rise in oil production and an 11% drop in natural gas production year over year. That's clearly the transition this company has been making. Not surprisingly, the results are already showing with revenue jumping up 72% in the first half of 2011. In August, management increased capital expenditures by almost 40% to $1.8 billion, excluding acquisitions, for this year. That interests me. While a precise update isn't currently available, I suspect a major drilling success that must have increased the company's developed resources substantially.
Add SandRidge Energy to your watchlist.
Kodiak Oil & Gas (NYS: KOG)
This company has come a long way in the last 12 months. Somehow, its real potential never got reflected in its numbers. However, things have been changing since. This Bakken player operates on one of the sweetest spots in the region. With 93,000 net acres, Kodiak's progress has been steady. The company took delivery of its fifth rig earlier this month and has a current production of more than 7,500 barrels of oil equivalent per day. Excluding acquisitions, Kodiak is confident of exiting this year at 9,000 BOE/D. Sales volumes grew substantially in the first nine months of the year -- a fantastic 151% growth compared to the corresponding period last year. With more land acquisitions and an expanding pipeline infrastructure, Kodiak looks like a perfect growth stock. With a market cap of $1.3 billion, the company doesn't look too hard to be acquired.
Add Kodiak Oil & Gas to your watchlist.
Foolish bottom line
While these stocks might look really mouthwatering, these aren't the only ones. The earnings season can throw up new surprises as well. To reiterate, Fools should stay abreast with the latest happenings. If you're looking for other great stocks to profit off the energy boom, check out The Motley Fool's special report, "3 Stocks for $100 Oil." You can download it for free by clicking here.
At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Total, Chesapeake Energy, and Statoil A. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.