Record levels of oil and gas properties changed hands last year with the industry's bad times seemingly behind it and oil prices on the upswing. All that deal activity - mostly between private and public companies - may lead to some mid-sized publicly traded companies being in play in 2017 as larger companies look to boost their development prospects and free cash flows.
Gabriele Sorbara, who follows the oil and gas exploration and production industry at Williams Capital Group LP, thinks the most likely targets are the ones situated in the core areas of the Permian, Anadarko and Appalachian Basins -- and to a lesser extent in the Eagle Ford, Bakken and Niobrara plays. In his coverage area, he names five companies as the best takeout targets given their running room across key resource areas -- and their cheap stock prices.
The first is Energen Corp. (NYSE:EGN), which operates in the heart of West Texas' and New Mexico's Permian Basin. The company is expected to expand its production by 20% per year over the next three years but inexplicably trades below its peers. It also has $1.5 billion in liquidity with which to execute, which could be boosted if it sheds its Central Basin assets for what Sorbara thinks could fetch $600 million.
His second pick is Laredo Petroleum Inc. (NYSE:LPI), which also has oil and gas properties in the Permian. There's a bit of an overhang on its stock as it also owns infrastructure assets, including 49% of the Medallion Pipeline in the Midland Basin, which could be spun off into a master limited partnership or sold. Private equity firm Warburg Pincus also holds about a third of its shares.
The third possibility is Newfield Exploration NFX +1.69% Co., which owns properties in the Anadarko and Arkoma basins of Oklahoma as well as the Williston Basin of North Dakota, the Uinta Basin of Utah and off the coast of China. The company has ample liquidity of $2.3 billion, which could be supplemented with the sale of noncore assets (it sold all of its Texas assets this past summer for $390 million). But the stock trades at a 6Permian Basin players given its stacked-pay resource potential in the Anadarko Basin.
The analyst's fourth pick is PDC Energy Inc. (NASDAQ:PDCE), which operates mainly in the Permian's Delaware Basin, where it recently expanded via the acquisition of two oil companies from Kimmeridge Energy Management Co. for $1.5 billion. It also has strong assets in the Wattenberg Niobrara and the Utica Shale, which could be sold to generate funds to plug in elsewhere. Sorbara thinks the stock should trade higher than its Niobrara peers given its Delaware properties. Newfield Exploration NFX +1.69%
A fifth prospect is SM Energy Inc. (NYSE:SM), which has properties in the high growth, high-margin Midland Basin, where it has expanded over the last year with $2.58 billion worth of purchases from Riverstone Holdings LLC-backed Rock Oil Holdings LLC and EnCap Investments LP-backed QStar LLC. Sorbara says the company deserves a higher valuation, especially now that it's agreed to jettison its Eagle Ford assets to KKR & Co. LP (NYSE:KKR)-backed Venado Oil & Gas LLC for $800 million. It sold its Williston Basin assets last month to Oasis Petroleum Inc. (NYSE:OAS) for $765.8 million.