A big part of the appeal to investors from the Monday announcement of the merger of Devon Energy and WPX energy is the anticipation of more such deals to follow. Here are two independent producers with a combined market cap of around $6 billion, as of last Friday, that have seen their share prices rise by 10% or more following the announcement.
Over the past two years, Devon shares had dropped 76% of their value at Friday’s closing price. WPX’s share price had dropped by 78%. The largest part of those declines is due to the economic downturn caused by the COVID-19 pandemic, coupled with the efforts by the OPEC+ group to cut crude oil production in an effort to raise prices.
Can investors expect to see more mergers in the oil patch now that Devon and WPX have broken the ice? Looking through the universe of publicly traded exploration and production companies of roughly comparable size, there are five that stand out.
Our screen looked for independent producers with a market cap between about $2 billion and $4 billion that have posted a Monday morning gain of 3% to 6%.
Apache Corp. (NYSE: APA), with a market cap of around $3.9 billion, gained more than 5.5% in morning trading. The stock price had dipped from nearly $21 a share in early March to $9.85 on Friday. The consensus price target on the stock is $16.91, implying a potential gain based on the current price of $10.59 of nearly 60%. The stock’s 52-week low is $3.80, and Apache pays an annual dividend of $0.10 (yielding 1.02%).
Diamondback Energy Inc. (NASDAQ: FANG) has the highest market cap in this group, at around $4.9 billion, and the shares added nearly 4.3% in Monday morning trading. In early March, shares traded at around $48.50, and they closed down about 38% on Friday at $29.90. The consensus price target on the stock is $59.05, implying a potential upside of 86% to the latest trading price of $31.66. The stock’s 52-week low is $14.55, and Diamondback pays a dividend of $1.50 (yielding 5.02% annualized).
Parsley Energy Inc. (NYSE: PE) has a market cap of around $3.9 billion, and shares added about 4.7% Monday. They had retreated from $10.52 in early March to a Friday close at $9.02, a drop of 14%. The consensus price target is $15.63, implying a potential gain of about 63% at the current trading price of $9.61. The stock’s 52-week low is $3.92, and Parsley pays an annual dividend of $0.20 (yielding 2.21%).
Marathon Oil Corp. (NYSE: MRO) has a market cap of around $3.4 billion, and shares traded up about 4.8% Monday morning. In early March, the stock traded at around $6.80, and it has since dumped about 39% of its value to close Friday at $4.14. The consensus price target is $7.47, implying a potential upside of 72% to the current price of $4.34. The stock’s 52-week low is $3.02. Marathon has suspended its dividend.
Cimarex Energy Co. (NYSE: XEC) has a market cap of around $2.5 billion, and shares traded up 5% Monday morning. As of Friday’s close, the stock traded down about 64% from around $15.10 in early March. The consensus price target on the stock is $40.58, implying a potential gain of 64% to the current price of $24.73. The 52-week low is $12.15, and Cimarex pays an annual dividend of $0.88 (yielding 3.74%).
A combination of any of these companies would have to meet the same two fundamental points that Devon and WPX set with their deal: a low premium and lower costs to improve shareholder returns.
Furthermore, it’s unlikely that a combination of any of these firms with a smaller outfit would have the effect of giving the combined company the scale it necessary to attract investors. A deal like that would only work if crude demand was outstripping supply, and that’s not likely to happen until late next year or early in 2022.