Energy M&A: The Natural Gas Bulls Are Back in Town

Energy M&A: The Natural Gas Bulls Are Back in Town

by Justin Dove, Investment U Research
Tuesday, October 18, 2011

Kinder Morgan’s (NYSE: KMP) $33-billion takeover of El Paso Corp. (NYSE: EP) is just one of a flurry of recent mergers and acquisitions in the energy sector.

Statoil (NYSE: STO) also took over Brigham Exploration (Nasdaq: BEXP) on Monday, and Sinopec (NYSE: SHI) acquired Daylight Energy (OTC: DAYYF.PK) last week.

Dealogic recently released data showing that energy and utility deals account for nearly a third of the dollar value for all worldwide merger and acquisition transactions thus far in the fourth quarter.

This likely means one thing: Companies with a bunch of capital think smaller natural gas companies are attractively cheap right now.

Energy Stock Volatility Continues

The market is extremely volatile due to fears of world economic crisis. Those fears are especially hard on the energy sector, as a global recession would crush oil and natural gas demand.

The Vanguard Energy ETF (AMEX: VDE) still hasn’t recovered from its sharp drop in August, and is still suffering losses greater than those of the S&P 500. But natural gas stocks have been doing even worse than the broad energy sector. The United States Natural Gas Fund (AMEX: UNG) fell just as far as the Vanguard Energy ETF, but hasn’t rebounded quite as quickly.

Energy Industry Insider Buying Increases

As Peter Lynch famously wrote, “Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the stock price is undervalued and will eventually go up.”

And according to Canada’s Insider News and Knowledge (INK) energy indicator, which measures insider sentiment in the sector, insider sentiment in the energy industry is at its highest levels since following the 2008 recession.

Below are a few natural gas stocks that recently had increases in insider buying:

• Encana Corp. (NYSE: ECA) – Encana had a rough month despite many reasons for investors to be excited about the stock. The stock is currently around $20 per share after being in the $30s for most of the 2011. It has pipeline projects in western Canada and the southern United States. It also has a hand in a joint venture that recently got approved by Canada’s National Energy Board to export from a deepwater port in British Columbia. This could be huge, as it would open up the company to the natural gas-hungry Asian markets. There were even takeover rumors swirling about Encana recently. And according to Ted Dixon at INK, five insiders bought a combined 60,000 shares at an average price of $24.13 in the past three months.

• Apache Corp. (NYSE: APA) – Apache is another company, along with EOG Resources (NYSE: EOG), involved with Encana in the British Columbian port venture. Its shares were recently hammered to nearly half of the 52-week high of $134.14 and are currently trading around $90 a share. A Director and the Executive Vice President both recently engaged in large insider purchases of the stock.

• Sandridge Energy (NYSE: SD) – Sandridge is another company trading at almost half of its 52-week high. It isn’t profitable yet, but part of that’s because of large capital expenditures over the past few years, which exceeded its cash flow. But insiders seem to be very optimistic that these expenditures will pay off soon. In October alone, 10 insiders made stock purchases. The company is relatively small and risky with a market cap under $3 billion and a beta more than double the overall market, but one has to wonder what these insiders are so excited about.

A Recent Flurry of Natural Gas M&A

No one has a crystal ball to see where the market will be in the future. However, large companies such as Kinder Morgan, Statoil and Sinopec hire the best and brightest to make strategic decisions such as timing mergers and acquisitions.

The recent flurry of natural gas acquisitions could be a good sign for the sector going forward. Add in the increase in insider buying and signs seem to be pointing toward a sector in need of a serious rebound.

With a recent surge in bull mentality by large companies and insiders alike, maybe it’s time for investors to put on their natural gas bull masks, too.

Good investing,

Justin Dove

Article by Investment U