Potential M&A Targets for Repsol
According to the Wall Street Journal, “Repsol is willing to spend between $5 billion and $10 billion on North American Exploration & Production (E&P) assets.” The newspaper also points at Whiting Petroleum (WLL) and Kodiak Oil & Gas (KOG) as possible targets.
Exploratory Success at Good Price
Whiting, held by Scott Black and George Soros, has been growing production fast. In million barrels of oil equivalent (MBOE) terms, production will grow by 12% year over year in 2013, and it's expected to grow by another 13% in 2014. Of course, high capital expenditures (at $2.5 billion this year) are burning cash fast, but growth prospects are huge. The company, which owns 88,000 acres in the Niobrara area in and 570,000 acres in the Bakken area, has now proved and developed reserves of just 190.3 million barrels of oil equivalent (MMBOE), 14% gas, but has more than 318 MMBOE extra potential reserves.
With net debt at a very manageable level (1 time EBITDA) and trading at just 4 times EBITDA, I think Whiting is a great target for Repsol or any other bigger company trying to get into a high potential American E&P company. Its $6.5 billion market capitalization and its oil (versus gas) profile makes it even a better prospect for Repsol.
A Highly Leveraged Play
Kodiak, held by Ron Baron and John Paulson, is considerably smaller than Whiting and, in every possible way, much more leveraged. The company has proved reserves of 57 MMBOE (16% gas), and 253 MMBOE extra probable reserves. As you can imagine from the previous figure, the company has a huge upside potential if probable reserves become proven ones. That said, the company has leveraged itself, expecting most of those probable reserves to come into production sometime in the future. Kodiak has a net debt to EBITDA ratio of 3 times. Of course, management has good reasons to feel positive about the company's trends. Production increased 267% year over year in 2012, and it's expected to grow by another 110% in 2013.
Its high production growth, high debt and high capex profile makes Kodiak an extremely leveraged play. Nevertheless, it could be a wonderful growth asset to own for a much bigger company like Repsol: Kodiak's market capitalization is just below $3 billion against Repsol's is $32 billion. Trading at 2013 6.6 times EBITDA and 2014 4.2 times EBITDA, Kodiak could be a good long, thinking of it as an M&A target for Repsol or any other bigger oil and gas player.
Both Whiting and Kodiak fall under the description of what Repsol is said to be looking for in the U.S. That said, both companies are different. While Whiting is a much more conservative play, Kodiak offers huge growth potential at the cost of high leverage. Naturally, no one knows whether Repsol will or will not finally acquire an E&P company in the U.S., but it's clear to me that both of these mid-capitalization companies are potential M&A targets in an industry that is consolidating itself.