The Zacks Analyst Blog Highlights: Actavis, Warner Chilcott, Bill Barrett, Linn Energy and Forest Oil

CHICAGO, May 22, 2013 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Actavis, Inc. (NYSE:ACT), Warner Chilcott plc (Nasdaq:WCRX), Bill Barrett Corp. (NYSE:BBG), Linn Energy LLC (Nasdaq:LINE) and Forest Oil Corp. (NYSE:FST).

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Here are highlights from Tuesday's Analyst Blog:

Actavis to Buy Warner Chilcott

Actavis, Inc. (NYSE:ACT) recently announced its intention to acquire Warner Chilcott plc (Nasdaq:WCRX) in a stock-for-stock transaction worth about $8.5 billion. This includes the assumption of Warner Chilcott's net debt of $3.4 billion.

The successful completion of this deal will lead to the creation of a leading global specialty pharmaceutical company with combined annual revenues of about $11 billion. The combined company will hold the third position in the US specialty pharmaceutical market with annual revenues of about $3 billion.

The deal is expected to close by the end of this year. The two companies will be combined to form a new company domiciled in Ireland where Warner Chilcott is currently incorporated.

Financial Details

Warner Chilcott shareholders will receive 0.160 shares of the new company for each share owned by them. This comes to about $20.08 per Warner Chilcott share, representing a 34% premium to Warner Chilcott's closing share price ($15.01) on May 9, 2013, a day before Warner Chilcott disclosed its merger plans with Actavis.

Meanwhile, Actavis shareholders will receive one share in the new company for each Actavis share owned by them. Once the deal closes, about 23% of the new company will be owned by Warner Chilcott shareholders. The new company, to be called Actavis plc,  will continue to trade on the New York Stock Exchange under the ticker symbol ACT.

Immediately Accretive

The Warner Chilcott acquisition will help strengthen Actavis' position in the women's health (eight products) and urology (six marketed products) segments. The company will also gain a presence in the gastroenterology (two marketed products) and dermatology (one marketed product and a new product launch slated for Jul 2013) markets.

Moreover, Actavis will gain a pipeline of 25 candidates include 15 targeting the women's health market.

Once the new company is formed, specialty brand sales are expected to account for 25% of 2013 sales, up from the current 7% contribution (stand-alone Actavis). The deal is expected to be accretive to Actavis' 2014 earnings per share by more than 30%. The company expects to achieve post-tax operational synergies and related cost reductions and tax savings of more than $400 million. While a major part of these savings will be realized next year, the full effect will be achieved in 2015.

The combined company's tax rate is expected to be about 17%, well below stand-alone Actavis' expected effective 2013 tax rate of 27% - 29%.

Our Take

We are positive on this deal which makes strategic and financial sense. The deal is expected to be immediately accretive. Moreover, it will provide strong operating cash flow and allow Actavis to de-lever its balance sheet. The tax rate will also be significantly below current levels.

Currently, both Actavis and Warner Chilcott are Zacks Rank #3 (Hold) stocks. Shares of both companies reacted positively to the acquisition news.

Another Strong Nat Gas Storage Build

The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies – the third in as many weeks – on account of milder-than-seasonal weather. Moreover, on a further bearish note, the build was well ahead of the five-year average levels, thereby narrowing the deficit with the benchmark.

About the Weekly Natural Gas Storage Report

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data

Stockpiles held in underground storage in the lower 48 states rose by 99 billion cubic feet (Bcf) for the week ended May 10, 2013, higher than the guided range (of 93–97 Bcf gain) as per the analysts surveyed by Platts. The increase – the fifth injection of 2013 – also exceeded both last year's build of 56 Bcf and the 5-year (2008–2012) average addition of 83 Bcf for the reported week.

Despite past week's build, the current storage level – at 1.964 trillion cubic feet (Tcf) – is down 694 Bcf (26.1%) from the last year and is 83 Bcf (4.1%) below the benchmark five-year average.

Natural gas stocks hit an all-time high of 3.929 Tcf last year, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

However, things have started to look up in recent times. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang has now gone, thereby driving commodity prices to $4.38 per MMBtu – the highest since Sep 2011.

This, in turn, is expected to buoy natural gas producers, particularly smaller players like Bill Barrett Corp. (NYSE:BBG), Linn Energy LLC (Nasdaq:LINE) and Forest Oil Corp. (NYSE:FST). With the financial incentive to produce the commodity and the subsequent improvement in the companies' ability to generate positive earnings surprises, they are likely to move higher from their current Zacks Rank #3 (Hold).

But natural gas demand is currently going through a lean period – with the end of the winter heating season and ahead of the peak cooling loads for summer. Therefore, until hot summer weather prevails across the country and increases electricity draws to run air conditioners, the commodity may experience above-average builds, thereby pulling down prices again.

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