This week started with news that Kodiak Oil & Gas had decided to hand over the keys to the company in a $6 billion deal with a larger rival. But before analysts or investors finished reading that headline, the speculation had already begun as to which company would be the next target. While much of the speculation centered on independent Bakken shale producers, the other compelling reason why deal making could be on the rise is the fact that hedge funds are making big bets on independent energy companies. So, given its history with hedge-fund meddling, SandRidge Energy (NYSE:SD) just might be the next $6 billion energy deal that goes down.
Targeting the targets
CNBC had an interesting article this week naming a few Bakken Shale focused companies that might be the next one to get bought out. The article focused on the hedge-fund involvement in the sector and noted that these investors could push for value creation, with an acquisition by larger rival the quick way to accomplish that task.
The article suggested that one of the reasons why Kodiak Oil & Gas was a buyout candidate was because famed billionaire John Paulson's hedge fund owned a 10% stake in Kodiak. Further, what's really intriguing is that Paulson's fund also owned a 7.8% stake in Whiting Petroleum (NYSE:WLL), which is the company that's acquiring Kodiak Oil & Gas. It is also worth noting that Paulson isn't the only investor that has overlapping ownership in both companies. In fact, six out of Kodiak Oil & Gas' top 10 investors were also top 10 investors in Whiting Petroleum, in fact, a full 60% of investors owned stock in both companies. Needless to say, merger synergies here won't just be had from combining the operations of the two companies, but the merger will save some paperwork for investors, too.
Why this might matter to SandRidge Energy
CNBC's article detailing potential takeover candidates noted three stocks in particular that have high hedge-fund ownership including WPX Energy (NYSE:WPX). It noted that four big hedge funds own shares of WPX Energy, including Omega Advisors, which also owns a large stake in SandRidge Energy. If we begin to see activist investors agitate for a merger mania in the energy space, these overlapping investors could be a key to which companies get matched together.
As I noted before, SandRidge Energy is no stranger to being targeted by activist investors. It was TPG-Axon Capital that waged a proxy war with the company, which ended in the dismissal of founder and former CEO Tom Ward. Among the many changes TPG-Axon Capital wanted to see at SandRidge was for it to exit its Gulf of Mexico operations, which it did earlier this year, and then eventually sell itself to the highest bidder.
Hedge-fund investors have also been vocal as to what price they'd be willing to sell as both Omega Advisors and TPG-Axon Capital think shares are worth at least $10 apiece. Though those numbers are a bit less than the value that CEO James Bennett sees as he has gone on record suggesting the company's net asset value is as high as $15.50 per share. The question that remains to be seen is how long these investors plan on waiting for Bennett to deliver on his plan to close the gap between the stock's price and the net value of the company's assets. Especially when an all-stock merger like the one Whiting Petroleum has proposed for Kodiak Oil & Gas is seeing an immediate realization of value for both companies and quick returns for big investors.
I'm not sure how long SandRidge Energy can remain an independent company if a merger wave hits the energy sector. While its activist investors are currently allowing new management to turn the company around, that leash likely won't be too long if value can be created quicker through merging with a larger peer.
Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. 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.