M&A activity has come back in full force in the oil and gas industry with rising oil and gas prices and analysts are starting to identify which companies could be taken out as a whole given the renewed interest in the sector.
Gabriele Sorbara, the former Topeka Capital Markets analyst who recently resurfaced at Williams Capital Group, has six potential takeover companies on his list. They include Energen (EGN) , Gulfport Energy (GPOR - Get Report) , Laredo Petroleum (LPI - Get Report) , Newfield Exploration (NFX) , PDC Energy (PDCE - Get Report) and SM Energy (SM - Get Report) .
Not surprising, the majority of the names - Enegen, PDC, SM Energy and Laredo -- have properties in West Texas' and New Mexico's Permian Basin, where most of the recent M&A activity has taken place and at increasingly higher valuations.
Sorbara contends that Energen is trading a discount despite its solid position in the Permian (224,000 net acres, including 86,700 in the Midland Basin and 49,351 in the Delaware Basin) and a strong balance sheet. He thinks the company will improve its capital efficiencies with a focus on high working interest long lateral wells and upsized completions, which will narrow the valuation gap with its Permian peers. He has a buy rating on the stock with a $68 price target, versus $56.92 this past Friday.
PDC Energy, which is primarily a Rockies operator, recently announced plans to enter the Delaware Basin through its acquisition of Arris Petroleum Corp. and 299 Resources Inc. from backer Kimmeridge Energy Management Co. for $1.5 billion. Despite regulatory risk in Colorado and the equity risk for funding the acquisition (which is expected before the closing in the fourth quarter), Sorbara believes investors should build/add to their positions in PDC given the multiple expansion potential driven by the new assets.
"PDCE should trade at a premium to the Niobrara names, given its exposure to the Delaware Basin," he said. He has a buy rating on the stock with a price target of $84 per share, versus $67.49 recently.
SM Energy remains one of the cheapest names in the sector despite its recent share price movement with a solid balance sheet and assets and a conservative management team.
Its recent acquisition in the Midland Basin (Rock Oil Holdings LLC from Riverstone Holdings LLC for $980 million) expands its footprint to nearly 47,000 net acres, providing significant running room across the stacked-pay Wolfcamp/Spraberry zones, Sobara said. He expects the company's industry-beating results to be transferred to its newly acquired assets as well. "Shares should capture a Permian Basin-type multiple blended into a shrinking Eagle Ford/Bakken story," he said, referring to the other two basins where it operates. He has a buy rating on the stock with a $57 per share price target, versus $37.70 recently.
As for Laredo, the company also has a sizeable position in the Midland Basin (130,000 net acres) but investors are only valuing its properties at $20,000 per acre versus $40,000 for its peers, Sorbara said. It also has a leveraged balance sheet ($1.5 billion in debt and only $65.8 million in cash) but Sorbara says it's "manageable." He has the company at a hold with a price target of $14 per share, versus a recent $12.61.
Gulfport is in Ohio's Utica Shale, which is known for large pockets of natural gas, whose price has been strengthening recently. He said the company has been trading at a low valuation (up 16.3% so far this year, versus 71.5% for its peers) but has a rich asset base with good takeaway capacity, a strong balance sheet and liquidity position and a solid hedge book. He calls the stock a buy and thinks it could reach $36 per share versus a recent $28.57.
Newfield, meanwhile, is in the Anadarko Basin, where it has 500,000 net acres, specifically in the hot Stack/Scoop play. Sorbara says despite trading at a discount compared with its peers, Newfield should thrive given its strong balance sheet, ample financial liquidity and strong hedge book and he thinks its valuation gap should narrow as it moves toward development mode with improving capital efficiencies. "Considering its tremendous stacked-pay resource potential in the Anadarko Basin, we believe shares deserve a valuation closer to the Permian Basin players," he says. He has a buy rating on the stock with a $58 per share price target, versus a recent $44.15.
Sorbara also has buy ratings on Pioneer Natural Resources (PXD - Get Report) with a price target of $217 ($179.50), Oasis Petroleum (OAS - Get Report) with a buy rating and a price target of $13 ($9.59) and Cabot Oil & Gas (COG - Get Report) with a price target of $30 ($25.23).
Besides Laredo, his other holds include Rice Energy (RICE) with a price target of $29 (versus a recent $26.90), Parsley Energy (PE - Get Report) with price target of $37 (versus a recent $33.91), Gastar Exploration (GST) with a price target of $1 (92 cents), Diamondback Energy (FANG - Get Report) with a price target of $105 ($96.33) and Cimarex Energy (XEC - Get Report) with a price target of $143 ($133.12).