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.
Callon Petroleum
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.
Carrizo Oil & Gas
This is a top energy stock for value buyers to consider. Carrizo Oil & Gas Inc. (NASDAQ: CRZO) is a Houston-based energy company actively engaged in the exploration, development and production of oil and gas from resource plays located in the United States. Carrizo’s current operations are principally focused in proven, producing oil and gas plays, primarily in the Eagle Ford Shale, the Utica Shale in Ohio, the Niobrara Formation in Colorado and the Marcellus Shale in Pennsylvania.
Many on Wall Street see the company as one of the best positioned due to the low breakeven costs, solid operating scale and a very good balance sheet with ample liquidity. Top analysts also think the company may take advantage of difficult situations for others and make acquisitions, especially in the Eagle Ford.
SunTrust has a price target of $30, while the consensus target is much lower at $19.57. The stock closed Wednesday at $10.67 a share, down over 4% on the day.
Matador
This company has been mentioned recently as a potential takeover target, and it is another new member of the Best Ideas list. Matador Resources Co. (NYSE: MTDR) is an independent energy company that engages in the exploration, development, production and acquisition of oil and natural gas resources in the United States.
The company primarily holds interests in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. It also operates the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas.
Since its IPO, Matador has grown its Permian acreage by more than tenfold as a result of acquisitions, and it has 2,151 net horizontal locations across multiple prospective zones.
The $29 SunTrust price target compares with the $26.35 consensus target. The shares closed most recently at $17.47, down 4.65% on the day.
Parsley Energy
This is another 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.
The company is a catalyst rich and is a Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.
SunTrust has set its price target at $27. The consensus price objective is $27.66, and the stock closed at $18.22, after climbing almost 3% on Wednesday.
These four top companies could be potential takeover targets. Even if none of them are bought, the stocks are all very cheap and trading at valuations that make them great additions to aggressive portfolios for investors who are looking to add energy at solid discounts.
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