Private investors are often chided for buying into companies when markets are high, and for sitting on the sidelines — or selling — when markets are low. You’d have thought company directors would have more nous. But no. History is littered with companies that made daft acquisitions when asset prices were at their most inflated.
Infamously, Vodafone acquired Mannesmann in a $183bn deal at the height of the telecoms bubble. Royal Bank of Scotland headed a consortium that forked out €71bn for part of ABN Amro right ahead of the credit crunch. Rio Tinto blew $38bn on Alcan at the top of the commodity cycle. And the list goes on.
Of course, just as we should be buying shares when markets are low, companies should be making acquisitions when assets are cheap. So, it’s hats off to Royal Dutch Shell (LSE: RDSB), Premier Oil (LSE: PMO) and Antofagasta (LSE: ANTO) for doing deals in the current oil and mining rout.
Dividend committment
Shell completed its $50bn takeover of BG Group last week. The FTSE 100 giant will be making further cost cuts as it seeks to navigate the low oil price environment. The group is also set to dispose of $30bn of assets over the next three years, as it focuses on deep water and liquefied natural gas.
Of course, selling while so many companies are desperate to offload assets isn’t ideal, but it appears Shell will focus initially on disposals in “oil price insensitive” business areas — such as refining, lubricants and pipelines — and will “backload” other sales towards the end of the three-year period when the oil price may have improved.
Shell has recently re-affirmed its dividend commitment for this year (the yield is 8.2%), and trading on 12.5 times forecast earnings, looks an attractive buy, with the BG acquisition set to boost returns when the oil price recovers.
A shrewd move
Historically, Premier Oil has a decent record of capturing long-term value through making acquisitions in low oil price environments. This mid-cap company’s balance sheet currently isn’t as strong as Shell’s, with net debt of $2.1bn at the last reckoning. However, cash and undrawn facilities were $1.5bn, and the first loans (relatively small at $250m) don’t mature until late 2017, with other maturities ranging from 2018 to 2024.
Last month Premier announced a deal to acquire the whole of E.ON‘s UK North Sea assets for $120m. This looks a shrewd move as it brings a number of advantages: a significant increase in immediate and cash-generative production (even at current oil and gas prices), beneficial tax synergies and a strengthened financial position as the deal is “materially covenant accretive”.
Premier would be more vulnerable more quickly than Shell if the oil price were to remain at depressed levels for a prolonged period, but it looks an attractive proposition for investors with a higher tolerance for risk. The company’s annual results are scheduled for Thursday.
A good bet
At the back-end of last year, Chilean copper miner Antofagasta completed a $1bn deal to acquire a 50% interest in a low-cost, high-quality copper mine from Barrick Gold. Antofagasta’s boss described it as “a rare opportunity” to acquire such an asset.
In last month’s Q4 production report, Antofagasta said it expects group copper production to increase to between 710,000 and 740,000 tonnes at a net cash cost of $1.35/lb, compared with 2015’s 630,000 tonnes at $1.50/lb.
Antofagasta has put its strong balance sheet to good use in making the acquisition at this time. The stock looks a good bet at current levels to make a strong recovery when the mining cycle turns up.
