Broker snap: Merger activity to pick up in oil sector

18th Jun 2010 12:42

Nomura Securities has picked up on increased mergers and acquisitions activity in the oil sector in recent weeks, with Africa-focused oil and gas company Afren and UK independent oil company Dana both announcing deals this month."Stronger cash flow generation, owing to the higher oil price environment, a narrowing of expectations between buyers and sellers, and better availability of financing, should see this uplift in deal activity sustained into 2H 2010 [second half of 2010], in our view," Nomura analyst Michael Alsford predicts. "We also believe one of the implications from the BP oil spill will be a shift in focus from the deepwater GoM [Gulf of Mexico] to international opportunities, and therefore it increases the value and appetite for exposure to regions where the UK E&P [exploration and production] sector remains focused (Africa and Asia)," Alsford claims.Nomura thinks valuations in the sector remain attractive, with "the sector drilling for prospects that could be worth up to 100% of market valuations over the next six to nine months." Cairn, in Greenland, and Tullow, in west Africa, remain the most active, Nomura notes, though Soco is also preparing for some drilling in the third quarter.On the macro level the broker sees oil prices well supported around current levels and expect a strengthening in the macro environment heading into the second half of the year, based on its expectation of improving global oil demand. "The UK E&Ps will also benefit from the continued strength of US dollar versus UK sterling," Nomura notes.The broker has made some slight modification to its price targets for Cairn (up from 479p to 488p), Premier (up from 1649p to 1671p) and Soco (up from 460p to 466p).Its preferred picks in the sector remain Afren, Premier and Tullow.