An Oil Patch Play — Via Canadian Banks

by Aaron Levitt | September 20, 2012 1:00 pm

An Oil Patch Play — Via Canadian Banks

So far in 2012, we’ve seen some pretty big deals in Big Energy. From beleaguered BP’s (NYSE:BP[1]) recent $5.5 billion deepwater asset sale[2] to Plains Exploration & Production (NYSE:PXP[3]) to the various Chinese state-owned energy firms adding shale acreage across North America[4], the sector has been alive with handshakes and penstrokes.

It’s easy to see why. As more traditional sources of petroleum have become harder to find, energy companies have been forced to look off the beaten path. Unconventional resources such as shale formations, Canadian bitumen sand and even Arctic exploration[5] have become commonplace.

Tapping those unconventional formations are a necessary evil.

Production at a variety of major energy producers has slipped during the past few years as legacy wells have begun to dry up. Generally, when exploration and production (E&P) firms can’t find oil quickly enough, they’re stuck with aging fields where overall output is declining. That’s a bad thing, considering the current high-price oil environment.

While it remains to be seen just how successful all of these deals will be, one thing is for certain: Their sheer number and size are increasing. Which raises the question: Is there any way for individual investors to profit from all this wheeling and dealing?

All About A&D

As the number of deals in the oil patch continues to growth, investors may want to focus on the little-known world of acquisition and divestiture. A&D firms are in the business of helping oil and gas trade and buy land. Investors can think of them like a commercial real estate broker, but instead of selling warehouses or office buildings, these firms promote shale fields.

Need to switch out of your high-cost/low-production dry gas properties into one a field filled with juicy natural gas liquids[6]? Place a call to your A&D banker. Running a pension fund and want to shift $4 billion into oil and gas wells? A&D to the rescue again.

Despite the growth in land sales and energy deals — the last 12 months saw over 26 natural gas-focused transactions alone — the business of giving advice on those transactions isn’t a very common service. Shifting through seismic data from firms like CGG Veritas (NYSE:CGV[7]) takes a vast knowledge of geology and technological know-how to figure out who’s low-balling whom, and whether deals are worth exploring.

Realistically, only a handful of firms specialize in the field, and that number is actually dwindling.

This brings us to the portfolio play here: Canadian banks.

Already known for their prowess in the energy sector — after all, Canada is an energy powerhouse[8] — the nation’s banking sector is quickly moving into the A&D space. A series of strong independent A&D company buyouts by leading Canadian financial firms[9] attests to the sector’s appeal. Aside from the fact that the number of increasing deals equals more and higher advisory fees, plenty of synergies are available as well.

For example, a large enough land deal could require lending capabilities or perhaps even an equity or corporate debt offering. The bank can help clients with that lending, or perhaps with foreign exchange trading if it’s a Chinese enterprise[10], or with commodities trading to hedge that dry gas and so on. The financial supermarket can offer an energy firm all these things under one roof, in addition to advice on the deal itself.

All in all, that’s a big win for the larger Canadian banks and their investors.

One Great Option

Back in early August, InvestorPlace Editor Jeff Reeves[11] highlighted the bargain banking play in our neighbors to the north[12]. Of those five, one really stands out for its A&D efforts: Canadian Imperial Bank of Commerce (NYSE:CM[13]), or CIBC.

The money-center bank recently purchased Houston-based A&D specialists Griffis & Small. The 10-person team of engineers and geologists has advised E&P companies on over $15 billion in transactions since its founding in 2002. That includes some heavy-hitters like Talisman (NYSE:TLM[14]) and Norway’s Statoil (NYSE:STO[15]). This aquisition beefs up CIBC’s own A&D team and should[16] lead to more lending activity in Texas’ energy hotspot.

As a company, CIBC can’t be beat. The bank recently saw a 42% jump in its third-quarter profit and trounced analysts’ expectations as write-downs stemming from the firm’s structured credit run-off business are no longer an issue. Across the board, from retail to commercial banking, CIBC saw higher profits[17]. Once those juicy A&D synergies come to fruition, they’ll boost revenues even more.

CIBC also continues to show investors the love by recently hiking its dividend by 4%. Shares now yield a high 4.9% and can be had for P/E of just 9.59. That’s less rivals like Toronto-Dominion (NYSE:TD[18]).

Clearly, CIBC offers investors a great way to play the growing market for A&D and the financial side of the energy business.

As of this writing, Aaron Levitt didn’t hold any securities mentioned here.

Endnotes:
  1. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  2. deepwater asset sale: http://investorplace.com/2012/09/pxp-now-in-deep-waters-with-oil-field-purchases-pxp-jpm-c-wfc-bac-xom-cvx/
  3. PXP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PXP
  4. adding shale acreage across North America: http://investorplace.com/2012/07/chinas-energy-buying-binge-is-just-starting/
  5. Arctic exploration: http://www.investorplace.com/2012/07/a-big-chill-for-shells-arctic-drilling-plans/
  6. juicy natural gas liquids: http://www.investorplace.com/2012/09/all-eyes-on-canada-for-next-big-shale-play/
  7. CGV: http://studio-5.financialcontent.com/investplace/quote?Symbol=CGV
  8. energy powerhouse: http://www.investorplace.com/2012/05/canada-gets-serious-about-energy-exports/
  9. by leading Canadian financial firms:
  10. if it’s a Chinese enterprise: http://www.investorplace.com/2012/07/chinas-energy-buying-binge-is-just-starting/
  11. Jeff Reeves: http://investorplace.com/author/jeff-reeves/
  12. bargain banking play in our neighbors to the north: http://investorplace.com/2012/08/5-sleepy-canadian-banks-providing-super-yields-ry-td-bns-bmo-cm/
  13. CM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CM
  14. TLM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLM
  15. STO: http://studio-5.financialcontent.com/investplace/quote?Symbol=STO
  16. should: http://studio-5.financialcontent.com/investplace/quote?Symbol=should
  17. CIBC saw higher profits: http://www.theglobeandmail.com/globe-investor/cibc-profit-jumps-42-boosts-dividend/article4509250/
  18. TD: http://studio-5.financialcontent.com/investplace/quote?Symbol=TD

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