Recently the Canadian energy giants Strathcona (TSX: SCR) and Cenovus Energy (TSX: CVE) are locked in a bidding war on the smaller pure game E&P, Meg Energy Corp (TSX: MEG). The two larger companies have made their bids for the smaller E&P and look to close the deal.
The commitment involved here are relatively large. Meg is a market capital company of $ 7.4 billion and Strathcona offers $ 7.8 billion. Even after the announcement of the deal, the top remains in the case of a successful closure.
There are two factors that complicate the issue for Strathcona:
- Meg’s lack of interest in the deal.
- Cenovus Energy’s competitive range of $ 7.9 billion.
Strathcona has previously tried to buy meg energy. The MEG board has never approved the deal and (of course) no deal ever closed. This time things don’t seem different. After receiving the Strathcona offer, the board of Meg reportedly felt ‘grumpy’, did not want to discuss. So it seems unlikely that they will approve the deal and recommend that shareholders vote for it.
Secondly, Cenovus has made a competitive offer for MEG worth $ 7.9 billion. This is currently $ 100 million more than what the Strathcona deal is worth. Since the range of Strathcona is an offer for all shares (0.8 SCR shares for each meg share), the value can change. At the moment, however, Cenovus seems to be the favorite to win every confrontation here – assuming that one happens at all.
What is worth meg
The obvious game here, if you think SCR or CVE’s takeover offers will actually close, is to go long meg shares. Both submitted offers are above the current stock price of MEG, so there is money to be made if one of them closes. At the same time, nothing is ever guaranteed. Investors should not buy these shares unless they think it makes sense with or without an M&A deal that is closed. With that in mind, let’s take a look at the company that may be purchased here.
In the backlog of 12 months, MEG Energy yielded the following financial results:
- $ 4.3 billion in income.
- $ 2.4 billion in gross profit.
- $ 794 million in business income.
- $ 551 million in net income.
- $ 639 million in free cash flow.
Most of these statistics had fallen on an annual basis when they were reported. As a result, MEG has the following growth tricks:
- Turnover: -23%.
- Business income: -19%.
- EPS: -1%.
It is not a great show about growth, but can Meg cheap enough to make up for it?
In my opinion, probably not. At the prices of today, MEG acts on:
- 13.8 times income.
- 1.8 times sales.
- 1.6 times book value.
- 5.4 times operated cash flow.
These statistics are lower than average for the TSX as a whole, but above the average for TSX energy shares. Suncor Energy – A much better company – Trades with only 12 times income.
Fool
Given everything I looked at in this article, I am not interested in buying MEG shares today. The company shrinks, and although oil is generally cyclical, the same weakness is not seen in other TSX energy supplies. Finally, MEG is becoming pricey on a sector-relative basis because of the mergers and acquisitions. I’d rather own Suncor than this.
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