M&A Targets Abound in Energy Sector

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Chevron Corp. (NYSE: CVX) just pocketed some $9 billion—more than $8 billion it didn’t spend to acquire Anadarko plus $1 billion in a breakup, probably paid by Occidental, which outbid Chevron for the privilege of spending around $38 billion in cash and stock to acquire Anadarko.

Chevron’s CEO, Mike Wirth, said in his concession speech that “winning at any cost” may not always be winning. For now, Wirth implied, Chevron is happy with its position in the Permian Basin.

But how long will that last? The Permian Basin that spreads northwestward from the Midland, Texas, area into southeastern New Mexico is where every oil company wants to be. Costs have come way down and, at prices over $60 a barrel, oil producers’ gross margins are may average more than $15 a barrel.

Chevron and other potential buyers might want to look at another handful of exploration and production (E&P) companies in addition to the six we profiled on Thursday. Industry analyst Michael Scialla at Stifel has two others in addition to the two that overlap with our prior list. These eight firms make plump targets for Chevron, Exxon or another of the giant integrated oil companies that might be interested in expanding its Permian holdings. To his list, we’ve added a couple of top-performing exchange-traded funds (ETFs) that investors might look at as a hedge play on whichever E&P is the next to get an offer.

Pioneer Resources Co. (NYSE: PXD) has a market cap of around $25.5 billion and is a huge player in the Permian Basin, with more than 20,000 drilling locations in the Midland Basin.

Concho Resources Inc. (NYSE: CXO) has a market cap of more than $22 billion and is the largest acreage holder among the publicly traded Permian large-caps, with substantial holdings across the Delaware Basin portion of the Permian.

In addition to these two that we’ve already noted, Scialla also likes Cimarex Energy Co. (NYSE: XEC) and Parsley Energy Inc. (NYSE: PE). Cimarex has a market cap of about $6.8 billion and boasts about 560 million oil-equivalent barrels of total proved reserves, with around 270 million of those barrels in the Permian Basin. Cimarex shares have gained about 3.8% since the beginning of the year, and the company’s 2018 pretax cash flow of $1.65 billion could not support more than $1.49 billion in capital spending last year.

Parsley’s market cap is around $6.5 billion, and the company expects to boost 2019 daily net oil production to an average of 80,000 to 85,000 barrels a day in 2019. According to RBEnergy, Parsley’s capital spending last year totaled $1.76 billion while pretax cash flow totaled $1.53 billion. At the end of 2018, the company had total proved reserves of about 522 million barrels of oil equivalent, including 294 million barrels of oil, all in the Midland and Delaware Basins.

For investors interested in being on the side of potential acquirers, the Energy Select Sector SPDR Fund (NYSEARCA: XLE) ETF holds shares in 29 oil and gas companies, with over 40% in shares of Exxon Mobil (22.23%) and Chevron (19.69%). The fund was established in December 1998 and since its inception had returned 7.5% through the end of March. For the year to date, the fund has added 16.21%. Assets under management currently total about $13.6 billion.

For investors more interested in sharing in the spoils that go to the acquired, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP) holds positions in 65 firms. It’s largest stakes are 3.44% in Anadarko and 2.46% in Parsley. The fund holds 2.18% of its $2.1 billion in assets under management in Concho Resources and 1.95% in Cimarex. Since its establishment in June 2016, the fund has returned 0.1%. Since the beginning of this year, however, the fund has returned 16.05%.

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