John Paulson of Paulson & Co., who correctly forecasted that both Whiting Petroleum Corp (NYSE:WLL) and Kodiak Oil & Gas Corp (USA) (NYSE:KOG) could be takeover targets, is now predicting increased consolidation in the U.S. oil and gas industry going forward.
His prophecy became fulfilled when Whiting Petroleum announced, a few days ago, that it would take over Kodiak. The company will buy $3.8 billion in Kodiak Oil & Gas Corp (USA) (NYSE:KOG) shares, and assume its debt of $2.2 billion. The deal has already been approved by both companies’ Boards, and will make Whiting Petroleum Corp (NYSE:WLL) the largest producer of crude oil in the Bakken Shale (one of the most prolific areas for horizontal drilling and fracking) and Three Forks formations. Mr. Paulson said that this deal could make Whiting more attractive that it was before the purchase.
“What’s driving the activity today is several factors. One is very low levels of interest rates. Two, a record stock market valuation, so companies can use either cash or stock to do transactions. And three, the transactions are accretive. So in a slow-growth environment, by doing a strategic, accretive transaction, corporations can grow faster than they can organically. And because of that, many of the acquirer stocks are being rewarded, and therefore the executives now are in position, in order to grow faster, acquisitions are part of the mix. And if they don’t grow, they themselves — if they don’t grow the acquisitions, they’ve — they may themselves become a takeover target. So that’s propelling activity. And I think that’s going to continue for the foreseeable future” (John Paulson – CNBC/Institutional Investor Delivering Alpha Conference).
However, Mr. Paulson’s predictions do not stop there. The hedge fund manager pointed out another independent producer that stands as a potential takeover target: Oasis Petroleum Inc. (NYSE:OAS), a $5.6 billion market cap independent oil and gas exploration and production company that operates in the Bakken Shale, and has been growing very rapidly lately. In addition, all of these independents have huge reserves. So, they will either be taken over, or their stock prices should increase on the back of their rapid growth, Paulson explained. So, what his fund did is become the largest shareholder in all three of the aforementioned companies: Oasis Petroleum Inc. (NYSE:OAS), Whiting Petroleum Corp (NYSE:WLL) and Kodiak Oil & Gas Corp (USA) (NYSE:KOG).
“While Whiting is bigger, in a sense it becomes more attractive to other large oil companies that don’t have a presence in the U.S. And the remarkable thing about the U.S. is that there’s no restriction on private companies buying oil assets.
Along with Canada, it’s I think the only country in the world where the oil sector is private. And if you’re a major oil company and you don’t have a presence in the remarkable revolution that’s occurring here, you’re sort of left out.
So ultimately I think the combined company as well as the other independents, you know, are still attractive to other larger acquirers.”
Disclosure: Javier Hasse holds no position in any stocks or funds mentioned