Low oil prices haven’t dampened Leon Cooperman’s enthusiasm for Atlas Energy, an independent producer of North American oil and gas. The manager of Omega Advisors in New York sees a lot of growth potential in the Pittsburgh-based $1.5 billion market cap company, particularly because in early March a bigger energy company, Targa Resources, is expected to complete a takeover of Atlas’s main lines of business.
“If you own Atlas you own Targa,” says Cooperman. Targa, a natural gas provider based in Houson, will acquire Atlas with a combination of cash and stock. According to the terms, for each of the 7 million shares of Atlas that Cooperman owns through Omega, he will receive a 0.18 share of Targa and $9.12 in cash, along with an ownership share in the exploration and production divisions that Atlas is spinning off into a separate company, to be known as New Atlas.
Cooperman and a number of other hedge fund managers believe that even though the stock of Targa has followed oil prices downward since the acquisition was first announced in October, the combined entity will be more valuable than the two parts. Analysts say that Targa and Atlas have the potential to grow together because the deal will bring on more opportunities to earn fees and a larger geographic reach. The acquisition is set to go through and Targa would suffer tax liabilities if it backed out, according to people familiar with the companies. Still, lower oil prices could make the deal less stellar than investors expected a few months ago.
Omega began investing in Alpha in the fourth quarter of 2006, and is now the largest shareholder, with about 14 percent of the company’s outstanding common stock. Remy Trafelet’s Trafelet Capital in New York had about 9 percent of its portfolio invested in Atlas as of the end of the third quarter. Others invested in Atlas include Harvard Management Company, Halcyon Asset Management in New York, Iridian Asset Management in Westport, Connecticut and Springbok Capital in New York. Among the hedge funds invested in the acquirer, Targa, are Hudson Bay Capital Management, Tiger Eye Capital, Blue Mountain Capital Management and Clinton Group as well as the quantitative firms Renaissance Technologies and Two Sigma Advisors — all based in New York.
“Our view has always been that Atlas has some of the best oil and gas basins in the U.S., and the midstream assets pipeline is of the highest quality,” says Adam Duarte, a portfolio manager at Omega who has been the firm’s main analyst for the deal, referring to Atlas’s transportation, storage, and wholesale marketing facilities. Granted, he says, “we know the world has changed a lot since October.”
When the two companies agreed upon the merger Targa valued the deal at more than $33 per share, but its stock had been trading at around $135 in early October. Targa’s stock has declined by about 30 percent since then, to around $95 as of early February. Atlas stock was trading at $38-$40 through most of October and was hovering at $30 in early February. There is a risk that the share price will be lower at the time the deal is completed, Duarte concedes.
Ultimately, however the success of the deal is riding on whether Atlas has more opportunites to grow. Cooperman asked Atlas CEO Ed Cohen, who is expected to stay on after the acquisition, about growth during the company’s third quarter 2014 earnings call on November 11, noting that when share prices are as low as they’ve been, “it’s not practical to grow the business through equity issuance.”
Cohen, who had already said he thinks the market is undervaluing Atlas, didn’t have a specific answer. “We clearly agree with you that the present price situation is ridiculous, but a cure will be found,” he said.
