Intrinsic Value and the Market
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recent takeover offer for Nexen (NYSE: NXY) for $27.50 cash (U.S.) by CNOOC (NYSE: CEO) at a 61% premium illustrates the disconnect between the intrinsic fair market value of a company, and its "Mr. Market" price.
Often, it can be years before the disconnect is corrected, if ever.
On July 20, 2012, Nexen traded for around $17 per share. At the close of the market on this date, the masses did not want to believe the obvious: that the stock was extremely undervalued, and would someday rise to its arguable, intrinsic value of between $25 to $30 per share.
Brokerages had targets ranging from $20 to $24 for Nexen on July 20, 2012. The takeover was announced on July 23, 2012, and the stock's price rose instantly to $26. The chances of the takeover being approved by regulatory authorities is estimated by some at 70%. The merger arbitrage opportunity is now approx. 6-7%. This is the highest percentage in the universe of billion dollar or more acquisitions.
But let's go back to July 20, 2012.
Why was Nexen trading so low? The problem was two-fold: perception and timing. The preception was that management wanted to go at it alone. Slow and steady will win the battle. Management was thought to escribe to the theory that eventually the market would recognize its intrinsic value. As for timing, Nexen had been shown the quick buyout path before, and had not gone down that path.
Hadn't that ship sailed in 2008 when rumored discussions with Total of France broke down? Where were the spinoffs designed to break up the pie and create value (i.e. 7% ownership of Syncrude)? Where was the outright sale to another third party?
Articles dating back to 2008 talked about Nexen being undervalued when trading in the mid-20s; of the need for divestment, spin-off, or an outright sale. Ironically, it appears that the market value in 2008 was $18 billion. Management would have served shareholders well by selling then to Total or another entity for a higher price in 2008 dollars.
But the past is the past.
Let's move to the instant events of 2012.
The clues to wealth creation through ownership of and/or the outright takeover of Nexen were in plain sight for those that were paying attention.
Those clues were as follows:
1) A large cap company ($9 billion) paying a dividend (1.1%), with analyst coverage, diversified oil and gas assets world wide, and trading on the TSX and NYSE.
2) Univerally thought of as undervalued with operationing issues. Also there were multiple analysts with higher target prices than market value.
3) The CEO and other management were dismissed in January, 2012, after deciding to "turn the company around" versus divestment/sale (this internal study was allegedly done without the Board of Directors' consent)
4) Nexen's coordination (2011) in the sale of its partner, Opti Canada, in the Long Lake oil sands complex to CNOOC
5) Nexen's joint venture (2011) with CNOOC, with some of its Gulf of Mexico assets
6) No permanent CEO being appointed since January, 2012
7) High option activity on NXY stock in July, 2012
Hindsight is always 20/20, but the clues were there for an offer to be made by CNOOC, or perhaps even another third party.
But there is good news
If you missed Nexen, you can still play another simliar stock, Talisman Energy (NYSE: TLM). It closed on July 27, 2012 at $12.65 U.S.
The clues, as with Nexen, are there.
1) A large Cap company ($11 billion), paying a dividend (2.25%), with world-wide oil and gas assets, which trades on the TSX and NYSE.
2) Universally thought of as undervalued, also with operating issues and analysts are jumping back on board en masse with targets ranging from $14-$15 in 12 months to $18-$20 in 2-3 years.
3) The stock price is down approximately 40% in the last 12 months.
4) Recently announced a joint venture with SINOPEC of China for 49% of its UK assets for $1.5 billion
5) Announced a $500 million dollar buy back of its stock (5%) of outstanding shares from the proceeds of the Sinopec sale, when it closes.
6) A variety of media and analyst coverage predicting it will be the next takeover target, if not by the Chinese, then perhaps by some other entity
Thus, based on the foregoing, takeover or not in the future, there are plenty of ways to benefit from the opportunity Talisman Energy presents based on the aforesaid clues.
THE AUTHOR, CHRISTOPHER LACICH, IS LONG NEXEN and TALISMAN ENERGY. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.