Chevron’s potential $33 billion, or Occidental's potential $38 billion takeover of Anardarko Petroleum could unleash a major wave of M&A activity in the oil industry, according to some industry experts and analysts. Other independent oil exploration and production (E&P) companies saw their shares jump on the news as investors speculate on the next potential targets. “I do think this will start a land rush of deals,” John Kilduff of Again Capital told CNBC.
“Different from last year, this transaction could also ‘kick-start’ investor interest in E&P’s with current valuations looking attractive, [free cash flow] generation that is growing, oil prices that are well above most budgets while service costs remain benign, and now possible interest by the Majors making the prospect for larger premiums and a cash component,” RBC analyst Scott Hanold wrote in a note.
7 Potential Takeover Targets
(Company name: market cap)
- Diamondback Energy: $13.29 billion;
- Concho Resources: $22.94 billion;
- Noble Energy: $13.03 billion;
- Pioneer Natural Resources: $29.58 billion;
- Parsley Energy: $5.81 billion;
- Apache: $13.96 billion;
- Hess: $19.22 billion.
Source: Barron’s, CNBC.
What it Means for Investors
Some of the primary targets are drillers located on oil-rich land and offshore holdings. Names like Diamondback Energy Inc. (FANG), Concho Resources Inc. (CXO), and Noble Energy Inc. (NBL), with their valuable land holdings in the Permian Basin, not to mention smart capital management, could see their shares rise as investors anticipate a future takeover, according to Barron’s.
Hanold names Pioneer Natural Resources Company (PXD) along with Noble and Concho as his top three candidates for a takeover. Pioneer has one of the largest positions in the Permian, as well as core acreage in Midland and the Delaware basins, and is capable of delivering organic growth of 10% and free cash flow over the next ten years and beyond.
In addition to Pioneer, oil equity analyst Paul Sankey at Mizuho Securities thinks Parsley Energy Inc. (PE) is another obvious buyout target. He also named Noble Energy as offering “deep value” for its assets in the Permian, Equatorial Guinea and Mediterranean. He told CNBC that he believes future consolidation will be motivated by attempts to more efficiently develop acreage in the Permian Basin.
While much of the focus has been on major shale players in the Permian, names like Apache Corp. (APA) and Hess Corp. (HES), which have large positions in North Dakota’s Bakken basin, are also attracting attention. Both companies’ shares moved higher after the Chevron–Anadarko deal was announced last Friday.
As service costs remain ‘benign’, according to Hanold, higher oil prices in the near term will add to the optimism pushing up potential takeover targets. As of Tuesday, oil prices have risen for six consecutive weeks, a bullish sign for both crude and stocks, according to analysis done by CNBC. Such six-week rallies have only happened five times since 2010 and on average, oil prices have been 2.61% higher and the S&P 500 has been 1.25% just one month later.