TGA(2.8) got $10.80 per share cash offer last year
Transglobe Energy Could Be A Potential Takeover Target In 2015
Dec. 30, 2014 1:52 PM ET | 34 comments | About: Transglobe Energy Corp (TGA)
Disclosure: The author is long TGA. (More...)
Summary
Transglobe Energy is selling at a bargain price.
A low oil price usually means consolidation.
Earlier this year, Caracal Energy made an offer to acquire Transglobe Energy.
Transglobe Energy (NASDAQ:TGA) is a international oil and gas producer focused in Egypt and Yemen. The company's most valuable area of operations is the West Gharib concession. The West Bakr field is the second-largest producing concession of the firm. It is located immediately beside the West Gharib concession. These two fields represent 94% of the Q3 2014 sales.
In fact, Transglobe Energy produced an average of 15,109 barrels of oil equivalent per day during the Q3 2014. Precisely, the West Gharib and the West Bakr contributed 60.2% and 34.1%, respectively, to total production. The remaining production comes form the East Ghazalat field in Egypt and from the negligible operations in Yemen.
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With production around 15,000 barrels of oil equivalent per day, Transglobe is one of the biggest oil producers in this region. Moreover, the royalties system is pretty advantageous. In fact, the Egyptian government works with a production sharing contract instead of a fixed government take. Consequently, the margin per barrel is resilient in a decreasing price environment. With a Brent price around $60 per barrel and a fixed government take, the company would have a netback of $8.54 per barrel. The firm currently has a netback of $12.38 per barrel due to the production sharing contract.
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With a favorable royalties system and efficient operations, the company has a trailing 12 months earnings per share of $0.96. The stock is currently selling at around $3.50 per share. Consequently, Transglobe Energy has a really low price/earnings ratio of 3.65. Moreover, with $305 million in current assets and $36 million in current liabilities, it has a extremely high current ratio (C.Assets/C.Liabilities) of 8.7. Finally, it cash and cash equivalents of $78 million represents a large 29.1% of the market capitalization. In brief, it is possible to conclude that Transglobe is a very cheap company. In an earlier article, I explained more in detail why I consider Transglobe to be a cheap stock.
Furthermore, strong oil prices usually mean that companies keep drilling to increase their production. On the other hand, weak oil prices mean consolidation. With oil prices around $60, many firms want to cut their production costs. Consequently, a low-cost producer like Transglobe Energy could be an interesting acquisition. A consolidation phenomenon took place in the 1990s when the oil price was weak. In fact, it was during this period that Exxon merged with Mobil. It is the same case today with talks about a merger between Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI). In brief, due to the low oil prices, there will most likely be consolidation in the industry.
The fact that Transglobe Energy could be a potential takeover target in 2015 is corroborated by the fact that the firm received an offer from Caracal Energy in March 2014. The firm was ready to acquire Transglobe for $10.80 per share. Even at that price, Caracal considered Transglobe as a cheap company. However, Caracal scrapped the deal after receiving a friendly cash takeover offer from the giant Glencore Xstrata.
In conclusion, weak oil prices will inevitably create mergers and acquisitions. Due to its really cheap valuation and its efficient operation, Transglobe seems to be an interesting potential takeover target. This hypothesis is based on the fact Caracal Energy was supposed to acquire Transglobe Energy due to its cheap valuation. Despite these positive aspects, it is only my hypothesis that Transglobe will be acquire. Please do your own due diligence before buying the stock.
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