M&A activity could pick up in Texas. Predicting which energy producers are going to be bought is tough, but there are a few companies it seems nearly everyone agrees on.
Barron’s recently interviewed Gordon Haskett event-driven analyst Don Bilson to talk stocks. Bilson has a unique approach to identifying value. He reads through transcripts and other lengthy documents in great detail, searching for things that could trigger a stock-moving corporate event—like a sale or a stock buyback.
And he has plenty of thoughts on which energy producers to focus on. Investors should listen, Bilson’s views often turn out to be prescient.
He was early to call an inflection in U.S. oil and gas M&A activity, recommending Pioneer Natural Resources (ticker: PXD) before Chevron (CVX) said on April 12 it would buy
(APC). Pioneer stock jumped 11.5% that day in sympathy with Anadarko’s 32% rise. Bilson believed Pioneer was ripe for a sale after the company replaced its CEO with the founder, Scott Sheffield, who was brought back out of retirement at age 66.
Along with Pioneer, Bilson thinks
(CPE) are attractive. Those four stocks are trading 16% lower than their historical average—based on oil reserves to market value. It can be challenging to value small energy firms on earnings—often they aren’t profitable early in their existence.
What’s more, those four are trading at about parity with major oil companies like Chevron and
(XOM) on the basis of value to oil reserves. Smaller companies usually trade at a premium, because big oil companies have to pay up to grow their enormous asset bases.
Corvex Management’s Keith Meister is excited about M&A in the Permian Basin, too. Meister said recently he would be surprised if Diamondback Energy, Pioneer Natural Resources, and Concho Resources remained independent in coming years. Barron’s and Bilson have already highlighted these three stocks.
(OXY) reportedly made a $70 bid for the company, $5 higher than Chevron’s price. Raymond James analyst Pavel Molchanov doesn’t think it is likely. “One-third of Anadarko is deep water assets and Occidental has no deep background,” Molchanov told Barron’s. “And who can take Anadarko from Chevron,” he asks rhetorically. Chevron is four times the size of Occidental, according to Molchanov.
Bilson doesn’t see a higher bid either.
Still the merger arbitrage spread is negative, making us wonder why people would hold Anadarko stock, just to receive less when the deal closes. The arbitrage spread is the difference between the value received when the deal closes and the current value of Anadarko stock. Merger arbitrage investors try to make lower-risk returns by capturing that amount. Right now, they will lose money if the deal closes as it is currently structured.
But even if another bid for Anadarko doesn’t emerge, there is plenty to own in Texas-based oil production. And the price to be paid doesn’t appear too steep, even after recent gains.
Write to Al Root at email@example.com