With the price of oil seemingly range-bound since rallying from the lows, and acreage prices in prime territories like the Permian Basin and the Bakken Shale looking incredibly reasonable, some on Wall Street are beginning to think some mergers and acquisition activity could be coming this spring.
In a new research report, Neal Dingmann and his outstanding E&P team at SunTrust Robinson Humphrey feel that the Permian, Bakken and the Eagle Ford are ripe for consolidation given the steep acreage discounts within the top regions.
The report noted this:
The high water-mark for acreage deals was set in September of 2018 at ˜$90,000/acre in the Permian with other transactions in the play ranging from $20,000-$70,000/acre adjusting for production and other plays trading as low as ˜$5000/acre. Our conclusion is that a number of E&Ps are likely set up for consolidation given our belief that they are trading for less than organic leasing/ private transaction values.
They also said this when discussing the potential suitors in the top regions:
Recent announcements alluding to acceleration of U.S. shale activity by major oil producers Exxon and Chevron make clear the necessity of scale to compete in the unconventional space. We believe that given the already massive acreage positions and inventory held by many of the majors, the most likely consolidators of smaller E&Ps would be the larger independent U.S. producers.
Seven companies in the SunTrust coverage universe are cited as potential takeover targets. We focus on four that also look reasonable on a valuation basis, and all are rated Buy at SunTrust.
This is one of the small-cap stocks that the SunTrust team feels very comfortable about currently. Callon Petroleum Co. (NYSE: CPE) is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties.
The company is focused on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin. Specifically, Callon’s drilling activity focuses on the horizontal development of various prospective intervals in the Midland Basin, including multiple levels of the Wolfcamp formation and the Lower Spraberry shale. Callon made a huge $570 million acquisition of 29,000 net acres last May, which more than doubled the Delaware Basin footprint.
The SunTrust price target for the shares is $11, and the posted consensus target is even higher at $12.13. The stock closed trading on Wednesday at $7.33.