WorleyParsons to Acquire Oil Sands Player Colt for AUD $1.1B

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MELBOURNE, AUSTRALIA (Daily Reckoning) – Today we return to business as normal following our little trip to fantasy land yesterday.

Well, it’s official, we are now within a spitting distance of another milestone.  No, not the All Ordinaries reaching 6,000 points.  That’s a given, we mean the All Ordinaries reaching 7,000 points, or a mere 17% rise.

How hard could that be, seeing as the Australian market has done at least that for the last three years?  What’s one more fabulous run to the summit between friends?

And how could the market not continue to cruise to the moon when mere mortals are subjected to headlines like these from Bloomberg News: “Leighton Triples Full-Year Profit Growth Forecast; Shares Surge to Record.”

Or what about this: “Stocks Rise to Record, Led by Leighton, Computershare and BHP.”  And, “WorleyParsons Shares Surge to Record on Acquisition of Canada’s Colt Co.”  Finally, “Computershare Profit More Than Doubles on Global Takeovers; Shares Surge.”

It’s almost enough to turn the most ardent grizzly bear in a raging bull.  Or perhaps it will turn the bulls into bears if they start to think the market is topping out.  Where should the average investor turn?  Gold was up again and so was the Aussie dollar, adding nearly one full cent in 48 hours.

But of the headlines above, the one which seemed to catch most investors’ eyes was the news that WorleyParsons (ASX: WOR) was going to buy Canadian oil sands player Colt Companies for AUD$1.1 billion.  The funding for the deal was helped by a share placement of $339 million worth of shares to institutional investors.

Thanks to the news, WorleyParsons shares added a whopping AUD $4.70 to close at AUD $27.30, a rise of 21%.

John Grace, fund manager at Ausbil Dexia told Bloomberg News, “It’s a very strong acquisition with a lot of strategic value for Worley in the North American market.  Parsons was a company-transforming acquisition and Colt is very similar for Worley.”

He went on to say, “Colt’s industry position is quite strong and gives Worley a chance to replicate over in North America what they have here.  For Worley it adds to earnings straight away and that is without even counting any synergies.”

So, what was the news that got everyone so excited about WorleyParsons?  The fifth slide of their half year results pretty much speaks for itself, “Half year net profit… up 53%”; “EBIT growth of 23.1%…”; “Basic EPS up 53%”; “EBIT and net margin expansion”; and “Interim dividend up 51.4%.”

The company presentation went on to say, “We expect the markets for WorleyParsons’ services will continue to be strong.  Our key markets and sectors are experiencing positive conditions and we are well positioned to respond to these opportunities.  Subject to conditions remaining favourable in these markets we expect to achieve increased earnings in the second half of 2007.”

One of their key markets is hydrocarbons, which of course includes oil and gas.  The acquisition of Colt will give Worley access to the Canadian oil sands, which, according to the company has the potential to “move Canada from number eight to number four in the world by 2015” in terms of world crude oil producers.  If it did so that would leave Canada just behind Russia, Saudi Arabia and the USA.  It would take it ahead of Iran and China.

And who do the Canadians export their oil to?  Of course, their big greedy neighbour.  Despite the protestations of the current US administration, it seems highly unlikely that the US will reduce its dependence on crude oil in the short term.  With continuing unrest in the middle east and less malleable governments in Central America, US companies are increasingly looking to shore up investments in the regions that offer most stability.

At the close yesterday WorleyParsons was trading at AUD $27.30.  Not bad considering they were only AUD $1.75 back in 2002. 

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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