When markets and sectors are depressed, consolidation is often the order of the day. Sometimes synergies can make a merged company more cost-efficient than the two individuals, and sometimes it can be a good way to pick up assets on the cheap — though whether either of those makes sense for J Sainsbury‘s rebuffed attempt at buying up Home Retail is a very good question.
But when it comes to small oil explorers in these difficult cheap-oil times, there really can be significantly greater strength in size, and for that reason I view the upcoming merger of Falkland Oil & Gas (LSE: FOGL) with Rockhopper Exploration (LSE: RKH) through optimistic eyes. The boards of the two companies agreed a merger in November but it needed court sanction, and on 5 January we heard that has been achieved and the Falkland board has confirmed shareholders’ approval of the plan.
Rockhopper up, Falkland down
The immediate results suggest that Rockhopper’s shareholders are happier than Falkland’s with the former’s shares up 2.4% as I write to 26.6p and the latter’s down 1.6% to 7.8p. After the Falkland share price crash in the wake of poor results from its Humpback exploration well in October, any deal was always going to be a lot tougher on the firm than had it taken place earlier. Since that disappointment, Falkland shares are down 61% and down 78% since their peak in February, although Rockhopper shares have suffered a 65% fall since their June peak.
As individual AIM-listed companies, Rockhopper has a modest market cap of £83m, while Falkland is even smaller at £42.5m — and if we need a reminder of the risks of investing in oil exploration, it’s a sobering thought that back in October the two companies were valued at £116m and £128m respectively!
Still, a combined company with pooled assets and a market cap of £125.5m will look, on paper at least, a more solid prospect. For one thing, it will provide more muscle in negotiations with the larger explorers in the region, like Premier Oil, when it comes to further exploration of the Sea Lion field in the North Falklands Basin where both of the merging companies have significant interests — Falkland’s Zebedee find has been one of the more exciting ones of late.
The deal is not quite done yet, as there will need to be final court approval and there’s a hearing scheduled for 15 January — and if it gets the nod, the merger should become effective on 18 January.
Who got the best deal?
With Rockhopper’s existing executive management to remain in charge of the merged company and Falkland’s CEO and chairman to only get places as non-executive directors on the new board, Falkland shareholders will probably feel they have the rougher end of this deal — but I don’t see there was much in the way of alternatives, and I think the merge is the best option for both parties.
Would I buy? No, larger oil explorers that have profits on the near horizon are risky enough for me, and I’m already down enough for now on my small stake in Premier Oil!
