With Anadarko Petroleum’s spurned offer to buy Apache all the talk last week, speculation is rampant about which company might be the next target in an expected new wave of M&A in the distressed oil and gas sector.
“It appears the oil industry is entering the final phase associated with a prolonged industry downturn, which is consolidation,” longtime oil and gas analyst Fadel Gheit of Oppenheimer & Co. said in response to the news.
The largest among some pundits’ targets is EOG Resources, a Houston-based oil and gas company born out of bankrupt Enron with properties in New Mexico, North Dakota, Texas, Utah and Wyoming. EOG has been acquiring through the downturn: On Nov. 7 the company said it picked up 26,000 net acres in West Texas’ and New Mexico’s Delaware Basin in the third quarter from unnamed sellers for $368 million, making the region its top prospect after South Texas’ Eagle Ford shale. Simmons & Co. International counts the company among its core holdings, along with Anadarko and Noble Energy, calling it “best in class” in its coverage universe.
But the company’s market capitalization of $45 billion would necessitate a major oil company swallowing it. It also trades very close to Simmons’ estimated net asset value for the company, so a premium might be minimal. Statoil has been mentioned as a possible suitor.
More likely to be taken out are companies in the same league as Apache in terms of market capitalization: Pioneer Natural Resources, Hess, Devon Energy and Concho Resources.
Dallas-area Pioneer is focused on West Texas’ Permian, the Eagle Ford and Midland basins and is a favorite of Simmons, which puts it in its “offensive bucket.” Simmons also likes Midland, Texas-based Concho, because of its oil properties in the Delaware and Midland basins, with analysts at Tudor, Pickering, Holt & Co. Securities calling it an overall top exploration and production pick. Hess, in New York City, has long been considered a takeout target, with its low debt, operating expertise and valuable properties in North Dakota’s Bakken Shale, the Gulf of Mexico and overseas, with Exxon Mobil often mentioned as a possible suitor.
The super-major has also been thought to be eyeing Oklahoma City-based Devon over the years; with its stock price half of what it was in the summer of 2014, now be the time to pounce. The company is led by recently installed CEO David Hager, who was COO of Kerr-McGee before it was purchased by Anadarko in 2006 for $16.4 billion. Co-founder Larry Nichols is retiring from the company’s board next year, leading some observers to wonder if the management disruption could lead to a deal.
Third Point’s Dan Loeb owns a large stake in Devon, saying in May that he thought the company was undervalued and could streamline its focus on top tier assets in the Permian, Eagle Ford and Cana-Woodford to boost its return on income. Devon’s management inferred on the company’s third-quarter conference call that it was open to asset sales, including selling its 50% stake in the Access Pipeline to a third party of majority-owned affiliate EnLink Midstream Partners for what analysts think would be around $700 million. “To maximize shareholder value, DVN needs to reallocate capital from lower ROR [rate of return] areas and/or monetize non-core assets,” TPH said recently.
Other potential targets often mentioned are a little further down the rung in terms of market cap, including Murphy Oil, Diamondback Energy, Encana, Energen and EP Energy.
Some have speculated that Anadarko went after Apache as a takeover defense, even though its properties didn’t really mesh with its own. Others say it was a financing measure during capital-tight times, with the company aiming to spin off its and Apache’s international assets to focus on domestic ones. Time will tell whether Anadarko becomes a target of capital-rich majors like Exxon Mobil, Chevron and BP.