Lately, Canadian vitality giants Strathcona (TSX:SCR) and Cenovus Vitality (TSX:CVE) have been locked in a bidding warfare over the smaller pure play E&P, MEG Vitality Corp (TSX:MEG). The 2 bigger corporations have made their bids for the smaller E&P and look dedicated to closing the deal.
The stakes concerned listed here are comparatively giant. MEG is a $7.4 billion market cap firm, and Strathcona is providing $7.8 billion. Even after the deal’s announcement, upside stays within the occasion of a profitable shut.
There are two components complicating the matter for Strathcona:
- MEG’s lack of curiosity within the deal.
- Cenovus Vitality’s competing $7.9 billion supply.
Strathcona has tried to purchase out MEG Vitality earlier than. MEG’s board by no means accredited the deal and (naturally) no deal ever closed. This time round, issues seem no completely different. After receiving Strathcona’s supply, MEG’s board reportedly felt “grumpy,” not wanting to debate the matter. So, it appears unlikely that they may approve the deal and advocate that shareholders vote in favour of it.
Second, Cenovus has made a competing supply for MEG price $7.9 billion. That is at present $100 million greater than what Strathcona’s deal is price. Since Strathcona’s supply is an all-stock supply (0.8 SCR shares for every MEG share), the worth may change. Nevertheless, proper now, Cenovus seems to be just like the favorite to win any showdown right here – assuming that one occurs in any respect.
What MEG is price
The apparent play right here, in case you assume that both SCR or CVE’s takeover presents will really shut, is to go lengthy MEG shares. Each of the tabled presents are above MEG’s present inventory value, so there may be cash to be made if one among them closes. On the similar time, nothing is ever assured. Traders shouldn’t purchase this inventory except they assume it is sensible with or with out an M&A deal closing. With that in thoughts, let’s check out the corporate that’s probably being purchased right here.
Within the trailing 12-month interval, MEG Vitality delivered the next monetary outcomes:
- $4.3 billion in revenues.
- $2.4 billion in gross revenue.
- $794 million in working earnings.
- $551 million in internet earnings.
- $639 million in free money movement.
Most of those metrics have been down on a year-over-year foundation after they have been reported. In consequence, MEG boasts the next progress metrics:
- Income: -23%.
- Working earnings: -19%.
- EPS: -1%.
It’s not an amazing exhibiting on progress, however may MEG be low cost sufficient to make up for it?
In my view, in all probability not. At immediately’s costs, MEG trades at:
- 13.8 instances earnings.
- 1.8 instances gross sales.
- 1.6 instances guide worth.
- 5.4 instances working money movement.
These metrics are decrease than common for the TSX as a complete, however above common for TSX Vitality shares. Suncor Vitality – a much better enterprise –trades at simply 12 instances earnings.
Silly takeaway
Contemplating every little thing I’ve checked out on this article, I’m not all for shopping for MEG inventory immediately. The corporate is shrinking, and whereas oil is usually cyclical, the identical weak point is just not being seen in different TSX vitality shares. Lastly, MEG’s gotten expensive on a sector-relative foundation as a result of M&A hype. I’d moderately personal Suncor than this.
