M&A Activity Leads to GS Attractive Coverage View on E&P Stocks

Goldman Sachs (GS) says that the “potential for M&A activity via corporate acquisitions and joint ventures adds another leg to our Attractive coverage view on E&P stocks.” They see a bottom and rise in natural gas prices. They reiterate their Attractive coverage view on E&P stocks based upon higher natural gas prices and the potential for additional corporate M&A.

With recent corporate acquisitions, GS says that “valuations of recent transactions suggest buyers are looking through weak North American natural gas prices and are willing to assume mid-cycle commodity prices while still paying for unbooked resource potential.” Three recent acquisition announcements involving Encore, XTO and Mariner Energy were all close to GS’s mid-cycle net asset valuations assuming $6.50/MMBtu long term natural gas prices. The values include unbooked resource potential as well. The recent M&A activity supports valuation floors even if natural gas remains low.

GS believes that natural gas prices are bottoming and that they are at a cyclical bottom. They believe that natural gas prices will move towards the high end of their $4.00 to $6.50/MMBtu trading range in the next 6 to 9 months. Although Street sentiment is negative, GS believes that small improvements in data points can be a positive catalyst for E&P equities.

With Canadian Spirit Resources Inc. (SPI) in a period of lower acitivity due to road bans in northeast British Columbia, now may be a time start buying at these prices. Furthermore, SPI has initiated a buy back of their stock because they believe that recent trading does not accurately reflect the value of their company. As Dundee Capital Markets says about SPI, “It’s only a matter of time!”