Not too long ago, Canadian power 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 below 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 elements 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 authorised 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’ll approve the deal and advocate that shareholders vote in favour of it.
Second, Cenovus has made a competing supply for MEG value $7.9 billion. That is at the moment $100 million greater than what Strathcona’s deal is value. 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 appears to be like just like the favorite to win any showdown right here – assuming that one occurs in any respect.
What MEG is value
The plain play right here, should you assume that both SCR or CVE’s takeover gives will truly shut, is to go lengthy MEG shares. Each of the tabled gives are above MEG’s present inventory value, so there may be cash to be made if one in every of them closes. On the similar time, nothing is ever assured. Buyers shouldn’t purchase this inventory except they assume it is smart 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 web earnings.
- $639 million in free money stream.
Most of those metrics have been down on a year-over-year foundation once they have been reported. Because of this, MEG boasts the next development metrics:
- Income: -23%.
- Working earnings: -19%.
- EPS: -1%.
It’s not an excellent exhibiting on development, however may MEG be low-cost sufficient to make up for it?
In my view, in all probability not. At right this moment’s costs, MEG trades at:
- 13.8 occasions earnings.
- 1.8 occasions gross sales.
- 1.6 occasions guide worth.
- 5.4 occasions working money stream.
These metrics are decrease than common for the TSX as an entire, however above common for TSX Vitality shares. Suncor Vitality – a much better enterprise –trades at simply 12 occasions earnings.
Silly takeaway
Contemplating every thing I’ve checked out on this article, I’m not concerned with shopping for MEG inventory right this moment. The corporate is shrinking, and whereas oil is usually cyclical, the identical weak point will not be being seen in different TSX power shares. Lastly, MEG’s gotten expensive on a sector-relative foundation as a result of M&A hype. I’d slightly personal Suncor than this.
