Chevron Corp. (CVX), facing the likely failure of its $30 billion bid for Anadarko Petroleum Corp. (APC), is likely to move quickly to pursue takeovers of a long list of other oil competitors to build out its empire. The group of potential targets includes Concho Resources Inc. (CXO), with a $21 billion market value, Parsley Energy Inc. (PE), at $6.1 billion, Pioneer Natural Resources Co. (PXD) at $25 billion, and Cimarex Energy Co. (XEC) at $6.5 billion, according to Stifel analyst Michael Scialla, as outlined by Barron’s.

4 New M&A Targets for Chevron

(Market Capitalization)

  • Concho Resources (CXO); $21 billion market value
  • Parsley Energy (PE); $6.1 billion
  • Pioneer Natural Resources (PXD); $25 billion
  • Cimarex Energy (XEC); $6.5 billion

Source: Stifel, per Barron’s

Oil Giants Vie for Permian Basin

On Monday, Anadarko announced that it favors the $38 billion offer it received from Occidental Petroleum (OXY), leaving Chevron in the dust. While the company could make a counteroffer, Stifel doubts that it will happen, writing that “the market nearly fully reflects the Occidental transaction.”

Anadarko is now trading about 15% above its peers based on one measure of earnings. Therefore, other oil companies now are relatively more attractive to Chevron, per Scialla.

That's especially good news for owners of these other rival oil stocks, given Chevron's possible bid for new targets could set off a bidding war with rival giant Exxon Mobil Corp. (XOM).

Analysts indicate that Exxon is likely to target some of the same companies as Chevron, including Pioneer Natural Resources and Concho Resources, per another Barron’s report. The main forces that are driving this aggressive oil industry M&A include the search for prized assets in the Permian basin.

In early April, Morgan Stanley identified Anadarko as a strong candidate for a buyout by Chevron. In the same note, analysts highlighted Pioneer Natural Resources as a good fit for Exxon, considering land holdings in the Permian region of Texas and New Mexico. Exxon and Chevron both have significant operation in the Permian regain and have expressed plans to increase their oil and gas outputs in the key territory over the coming years.

While oil prices have been on the rise, the industry has failed to see its share prices keep up with the broader market rally. The SPDR Oil & Gas Exploration & Production ETF (XOP) is down more than 15% over 6 months, compared to the S&P 500’s 5.3% gain over the same period. In light of recent deal activity, shares of companies with exposure to the red hot Permian basin have outperformed, including Pioneer, up 16.6% YTD, Concho Resources, up 7.9%% and Cimarex Energy, which has increased 9.4%.

SunTrust Robinson Humphrey analyst Welles Fitzpatrick wrote a note to clients indicating that Chevron’s bid for Anadarko could mark the start of a wave of deals, as oil firms respond to investors’ desire for economies of scale. This should benefit energy exploration and production companies the most, said Fitzpatrick, as well as ignite a re-evaluation of other companies in the industry.

Looking Ahead

Moving forward, investors can expect more M&A activity in the oil and gas space, and would be wise to choose potential acquisition targets before deals are announced on the likelihood of a major share boost. Shares of Anadarko have gained more than 75% over three months.

Robert Thummel, portfolio manager at Tortoise Capital Advisors, echoed Humphrey’s sentiment in an email to Barron’s, writing that the mega-deals are just getting started in the energy space. He views the main drivers of M&A as the desire to expand shale territories, add drilling locations and lower operating costs.

“Acquisitions of independent oil and gas shale producers are an avenue to accomplish this,” he wrote.