Wednesday morning’s announcement that Occidental Petroleum Corp. (NYSE: OXY) had countered a previous bid of $33 billion in cash and stock from Chevron Corp. (NYSE: CVX) to acquire Anadarko Petroleum Corp. (NYSE: APC) did not generate the same boost to the share prices of other oil and gas exploration and production (E&P) companies as did Chevron’s offer of just two weeks ago. In fact, with the exception of Anadarko and one or two other E&P firms, companies that may be targets for acquisition are all trading down on the day.
Partly that’s due to last week’s unexpectedly large build of 5.5 million barrels to the nation’s crude oil stockpile. Refinery throughput rose by more than half a million barrels a day and operating capacity is back above 90%. These all signal a lower short-term price for crude oil and that signals lower prices for potential acquisition targets.
What the E&P industry needs now is some buyers. Chevron and Oxy are fighting over one of the best available positions in the Permian Basin. Anadarko holds 600,000 net acres in the Permian’s Delaware Basin, an amount that would make either Chevron or Oxy the largest rights holder in the world’s most productive shale basin.
But more than two weeks have passed since Chevron made its offer for Anadarko and no other offer for another Permian E&P company has surfaced. So, either potential acquirers are keeping their powder dry, waiting for the right moment, or there aren’t any buyers.
The list of supermajor integrated oil companies that could be looking for more Permian acreage includes Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell PLC (NYSE: RDS-A), Total S.A. (NYSE: TOT), Equinor ASA (NYSE: EQNR) and Eni SpA (NYSE: E). The other supermajor, BP PLC (NYSE: BP), dropped $10.5 billion last year to pick up BHP Billiton’s U.S. onshore assets, so the British firm is likely not looking for another major deal.
Shell was reportedly in discussions late last year to acquire privately held Endeavor Energy Resources for a reported $10 billion that was then knocked down to around $8 billion. Endeavor has leases on more than 373,000 net acres in the Permian’s Midland basin and produced 72,000 barrels of oil equivalent per day in the fourth quarter of 2018. Analysts at Moody’s reported last August that the company had 216 million barrels of proved reserves at the end of 2017 compared to Anadarko’s 1.47 billion at the end of 2018. That would indicate a valuation for Endeavor somewhere north of $5 billion, apparently much less than the Autry Stephens family is willing to consider.
Total said last August, following BP’s $10.5 billion acquisition, that the French company was not looking for acquisitions in U.S. shale plays. The company’s CEO said the oil was too pricey and that Total didn’t have the human resources to take on new technology. Italy’s Eni has also kept its wallet closed to adding U.S. shale to its portfolio.
Another firm that is also unlikely to add to its U.S. shale portfolio is Equinor. The Norwegian-controlled firm formerly known as Statoil has been trying to sell some or all of its operations (82,000 net acres) in the Eagle Ford shale play in south Texas. In 2015, the company said it held leases on 410,000 net acres in the Marcellus shale play (the U.S. Appalachian region) and 249,000 net acres in the Bakken. The company has begun increasing its focus on natural gas both in Europe and around the world and deemphasizing its oil production.
In early March, Norway’s sovereign wealth fund announced that it would divest about $7.5 billion in E&P stocks from its $1 trillion fund. Among the stocks planned for divestiture were Anadarko and Oxy. Stocks in integrated oil majors like Exxon and Chevron would remain in the fund’s portfolio.
With the big guys in the picture, Occidental itself was a potential target, but now that Oxy has decided to try to double in size, no buyers are likely. That leaves a host of large-cap and mid-cap firms that have been on analysts — if not an acquirer’s — radar for a long time.
24/7 Wall St.SunTrust Robinson Humphrey looked at six potential targets recently and we matched those with our own data on Buy-rated E&P stocks and found that all six were top picks. One, EOG Resources Inc. (NYSE: EOG), has a market cap of $61.47 billion, even larger than Occidental’s $45.45 billion cap, and would not be a likely target for any but the largest supermajors.
The largest by market cap is Pioneer Natural Resources Co. (NYSE: PXD), which is valued at $29.37 billion. Pioneer is a huge player in the Permian Basin and the Eagle Ford, 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 2019 and beyond. Pioneer pays a tiny 0.32% dividend and shares traded Wednesday morning at $174.35, down about 0.8%, in a 52-week range of $119.08 to $213.40. The consensus price target on the stock is $196.88.
Concho Resources Inc. (NYSE: CXO) has a market cap of $24.23 billion and is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the best catalysts across the Delaware Basin, including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale. Concho pays a 0.45% dividend, and shares traded Wednesday morning at $121.70, down about 0.7%, in a 52-week range of $93.31 to $163.11. The consensus price target is $153.97.
With a market cap of $13.37 billion, Noble Energy Inc. (NYSE: NBL) has operations in the Permian and other U.S. basins, but its principal focus right now is a massive natural gas project in Israel. Noble pays a 1.99% dividend, and shares traded Wednesday morning at $27.88, up about 0.1%, in a 52-week range of $17.11 to $37.76. The consensus price target is $32.80.
24/7 Wall St.PDC Energy Inc. (NYSE: PDCE) has a market cap of $3.04 billion and is a diversified E&P outfit with assets in the Rockies, the Permian and Utica Shale. The company recently acquired a 55,000 net acre position in the Permian. PDC is targeting 10% to 15% production growth in 2020, and progress continues with operating expense improving and well cost declining in the Delaware with longer laterals and modified completion design. PDC does not pay a dividend, and shares traded Wednesday morning at $46.03, down about 1.2%, in a 52-week range of $26.59 to $66.20. The consensus price target is $55.83.
SRC Energy Inc. (NYSE: SRCI) is a small-cap ($1.56 billion) E&P company with net proved oil and natural gas reserves of 88 million barrels of oil and condensate, 771.9 billion cubic feet of natural gas and 89.1 million barrels of natural gas liquids in the Denver-Julesburg Basin. SRC also pays no dividend, and traded down about 2.4% Wednesday at $6.43 in a 52-week range of $4.01 to $13.32. The consensus price target is $8.22.
One interesting observation regarding these potential targets is that the smaller ones are showing the most damage today. That could mean that consolidation among the small E&P firms is fading.
About two weeks ago, analysts at Stifel named five stocks that showed an implied upside of 100% or more. In addition to Concho, the others were Chaparral Energy Inc. (NASDAQ: CHAP), Carrizo Oil & Gas Inc. (NASDAQ: CRZO), Parsley Energy Inc. (NYSE: PE) and QEP Resources Inc. (NYSE: QEP).
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