Royal Dutch Shell‘s £47bn offer for BG Group is the biggest deal yet to emerge from the current oil sector slump, but it won’t be the last.
Companies that will attract bids will have depressed share prices and high-quality assets, which the majors can use to replenish their reserves at a lower cost than through exploration.
In my view, three UK-listed companies that are definitely in play are Genel Energy (LSE: GENL), Ophir Energy (LSE:OPHR) and Dragon Oil (LSE: DGO) — which has already received a bid, but may resist — as I’ll explain below.
Genel’s progress in Kurdistan has been impressive. Oil production rose by 58% to 69,000 barrels per day in 2014, and the company is about to begin exploiting its sizeable gas assets.
Unlike Gulf Keystone Petroleum, Genel has a strong balance sheet, with ample cash and access to cheap debt. This will protect it from an opportunistic low-ball bid.
In a Bloomberg interview last week, Genel boss Tony Hayward said that the firm would either continue to grow or receive an offer that was too good to refuse — in his view, both options are “equally likely”.
Genel shares have fallen by more than 30% over the last six months, and remain a buy, in my view.
Dragon is a special case: its majority shareholder is the Emirates National Oil Company (ENOC), which effectively blocks takeover bids from other firms.
ENOC recently approached Dragon with a possible takeover offer, which you might think would be a done deal. However, this will require the approval of the firm’s other shareholders, which may not be forthcoming.
A previous attempt by ENOC to take control of Dragon in 2009 failed, reportedly because Scottish investment group Baillie Gifford, which has a 7% stake in Dragon, opposed the deal.
Most of Ophir’s biggest gas discoveries were made in partnership with BG Group. The firm’s offshore Tanzania gas fields contain more than 17 trillion cubic feet (TCF) of gas, and it has other significant gas assets elsewhere.
Ophir’s recent acquisition of Asian oil and gas producer Salamander Energy means that the firm now has regular revenues and can afford to wait for the market to recover — or for a strong bid to emerge. Given the global scale of its gas assets, I believe this is a near-certainty.
Today’s best buy?
Although each of these companies has a good chance of receiving a bid in the next year, buying shares in the hope of a takeover bid is a risky strategy.
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Roland Head has a long position in Genel Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.