Energy

6 Permian Basin Energy Stocks May Be the Next Takeover Targets

Lee Jackson

Published: March 29, 2018 8:10 am

Last Updated: January 12, 2020 1:57 am

It’s been a long time coming, but many on Wall Street that follow the energy sector have felt for some time that there could be consolidation in the Permian Basin region, and the buying may not only be relegated to the smaller companies located in certain strategic areas. With a big deal hitting the tape, there are many who will start looking for the next potential candidate.

RSP Permian Inc. (NYSE: RSPP) exploded on Wednesday, on news that Concho Resources Inc. (NYSE: CXO) is buying the exploration and production company in an all-stock transaction worth a tidy $9.5 billion. The deal price, which includes $1.5 billion in debt, is expected to close in the third quarter of this year, pending regulatory approval. The deal reportedly was already unanimously approved by both boards of directors.

With the United States poised to the world leader in oil production as early as this year, more deals for the top Permian Basin companies are highly likely. Here we focus on some of the potential candidates and screened them against our Wall Street research database looking for Buy ratings.

Cimarex Energy

This is a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.

The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.

Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.

Investors receive just a 0.3% dividend. The Baird price target for the stock is $136, but the Wall Street consensus target is $142.73. The shares closed Wednesday at $92.75.

Diamondback Energy

This is a top Permian Basin play for more aggressive accounts and a favorite pick at Deutsche Bank. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.

Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.

Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.

Jefferies has a $160 price target and the consensus target is $155.24. The shares closed Wednesday at $124.67.

EOG Resources

This leading energy company shows up well on many Wall Street screens. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.

The company has a big well in Loving County in the Delaware Basin. Top analysts say the well ranks as one of the best they have ever seen in the basin, and it could easily impact other companies drilling in the region. EOG’s average dollar gross per well on a yearly basis is a stunning $4.3 million, which ranks third among all operators.

Shareholders receive a 0.71% dividend. The $145 Baird price target is well above the $125.11 consensus target. The stock closed on Wednesday at $103.82.

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Parsley Energy

This is a smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin.

Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.

Parsley is a catalyst rich and a Permian Basin pure play. The company has some of the strongest wells in the basin, generating returns that are among the best in the industry. Parsley is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.

Baird has set its price target at $33. The consensus target is $37.55, and shares closed Wednesday at $27.34.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian as it expects to deliver solid production growth in 2018 and beyond.

The company’s unmatched depth of low-cost inventory and balance sheet allow it to compete favorably in both mild and moderate recovery case scenarios. In addition to asset and financial strength, many analysts feel that Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers, as well as the highest free-cash-flow yield.

Investors receive a 0.05% dividend. The $260 Stifel price target compares with a consensus figure of $219.42 and the most recent close at $167.52.

WPX Energy

This smaller capitalization company with solid upside potential is another top Permian Basin play. WPX Energy (NYSE: WPX) is an independent oil and natural gas exploration and production company that engages in the exploitation and development of unconventional properties in the United States. Its principal areas of operation include the Permian Basin in Texas, the Williston Basin in North Dakota and the San Juan Basin in New Mexico and Colorado.

WPX is a premier Permian-levered operator with sector-leading debt-adjusted cash flow growth supported by strong execution in the core Delaware, all while trading at a Williston Basin valuations primarily due to its relatively high financial leverage.

WPX offers differentiated upside in a recovery case based on its asset quality/productivity and debt leverage. The company is the largest acreage holder of the publicly traded mid-caps and may have pound-for-pound the best position in the Delaware Basin.

Baird has a $21 price target. The consensus price objective is $19.81, and the stock closed Wednesday at $14.05.

These six top stocks all make good sense for investors looking to add energy, especially companies with Permian Basin exposure that could be takeover candidates. The recent selling is offering some timely entry points for investors with a long-term horizon.