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Currently hedge fund activists have found their new favorite sector to bring their form of activism - the oil patch. With WTI prices holding above $90 and Brent above $100, there's quite frankly no excuse for an energy stock to be underperforming the overall market. Recently, Paul Singer has targeted Hess (NYSE:HES), Carl Icahn Transocean (NYSE:RIG) and Chesapeake Energy (NYSE:CHK), and Barry Rosenstein and David Einhorn have both targeted Oil States International (NYSE:OIS). Here are 4 names that could be activists' next target or a possible takeover candidate.

Devon Energy Corporation (NYSE:DVN)

52-week Performance: (2.54%)

Devon Energy is one of my favorite stocks in the natural gas space and I have highlighted the company several times and most recently in An Update On 5 Natural Gas Stocks To Own. In my opinion the company is extremely undervalued, but the stock has been a perpetual underperforming stock. While the overall market has risen over the past year, Devon Energy is actually down in the past year. Quite frankly, with the company's assets, that should not be the case. Management has failed to realize value for shareholders.

Management at Devon has failed to make aggressive use of the company's cash and has not done much to return cash to shareholders. Currently, there's over $6.5 billion in cash on the balance sheet and the budget for exploration and development is only $1.5 billion this year. Management did increase the annual dividend, but only by 8 cents. This took the dividend yield from 1.40% to 1.50%.

The company has a great position in both the Permian Basin and the Mississippian. In the Permian Basin, Devon has 1.3 million net acres. In the Mississippian Devon has 600,000 net acres. Both are prime energy plays and an argument can be made that Devon isn't drilling fast enough. An increase in the exploration and production budget would certainly get things moving quicker to bring more production online.

One bright spot for Devon is the company is evaluating spinning off its midstream assets into an MLP. The company talked about this on its latest earnings call and a decision is expected by the end of this quarter. If an activist were to get involved, the midstream assets would be spun-off for sure. The hesitancy by Devon's management is a frustration for shareholders and is evidenced by the stock price.

Apache Corp. (NYSE:APA)

52-week Performance: 1.04%

I've highlighted Apache before in 1 Of These 3 Will Be The Next Supermajor. Apache has the potential to one day become a supermajor with its prime assets, but management has not done much to reward shareholders. Just recently Apache announced that it would sell up to $4 billion in assets to shore up its balance sheet and do a share buyback. In my opinion, this is a preemptive move before an activist buys a stake. I still think Apache can do more.

Apache has some very attractive assets. In Canada, Apache owns 50% of the first approved LNG export facility in British Columbia. This is an attractive location because western Canada is closer to the Asia-Pacific region where demand for LNG is the greatest. Apache also has a 50% interest in 644,000 gross undeveloped acres near the LNG facility. Apache is positioned with its partner Chevron (NYSE:CVX) to have a complete vertically-integrated operation.

In the U.S., Apache has 12.3 million gross acres, 60% of which is undeveloped. Apache has prime leases in the Gulf of Mexico and is spending over $1 billion this year developing those leases.

Apache is the largest leaseholder in Egypt's western desert with 9.7 million gross acres. Apache's exposure to Egypt has been somewhat of an overhang on the stock with the political situation in Egypt, but it's greatly exaggerated. Apache's properties are nowhere near any unrest.

From a fundamental perspective, Apache is cheap. The stock trades at a forward P/E of 8.64. Current operating margin is an impressive 38.38%. Quarterly revenue growth and quarterly earnings growth are down 10% on a year-over-year basis. The company only pays an $0.80 per share dividend for a yield of only 1%. The dividend payout ratio is a paltry 15%.

I think Apache has tremendous potential and would love to see an activist come in and shake the company up.

National Oilwell Varco (NYSE:NOV)

52-week Performance: 6.40%

National Oilwell Varco is in a slightly different position than the other possible targets. National Oilwell is in the fortunate position of being a holding of Warren Buffett's Berkshire Hathaway. Berkshire Hathaway now owns almost 7.5 million shares worth $529 million.

The company certainly does fit Buffett's criteria by looking at its strong position in the oil and gas industry. National Oilwell Varco is an industry leader with a strong market share. The company is a worldwide provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.

In looking at the fundamentals, we see that the stock trades at a forward P/E of 10.93 and has a PEG ratio of 0.86. The current operating margin is 16.30% and return on equity is 12.14%. On the balance sheet, there's $2.44 billion in cash to $4.35 billion in debt. Book value per share is $48.10 and operating cash flow is $1.19 billion. The annual dividend is $1.04 for a yield of 1.50%.

CEO Pete Miller is optimistic about the future for National Oilwell Varco. He sees the company as well positioned to capitalize on developments in China, Latin America, Russia and Southeast Asia. The company has a strong backlog and the company would really get a boost from a pickup in U.S. activity if natural gas prices keep heading higher. I'm optimistic on the company long-term and shareholders might just have to be a little more patient. Hopefully, one of its largest shareholders though, Warren Buffett, gets impatient and makes a bid for the entire company.

Occidental Petroleum (NYSE:OXY)

52-week Performance: 15.39%

Occidental Petroleum is actually the best-performer among the four, but it still lags behind the S&P 500. Occidental also has the largest market cap of the four at $74.64 billion, so it would be a stretch for an activist to buy a large enough stake to influence the company. However, just recently its former Chairman Ray Irani withdrew his name as a nominee to the board when it emerged that he didn't have enough votes to win election. After 20 years, he is finally gone from the company. Shareholders, quite frankly, are tired of the stock underperforming and Irani making over $1 billion in the process. Shareholders are finally demanding change at Occidental.

Wall Street is starting to notice and get bullish on the stock. BofA/Merrill Lynch has a Buy rating on the stock and a price target of $120. Analyst Doug Leggate thinks the company could be worth $150 in a split.

Occidental Petroleum has a current market cap of $71.99 billion. The stock trades at a forward P/E of 12.01. Operating margins are 29.16% and return on equity is 11.13%. On the balance sheet there's $2.14 billion in cash to $7.62 billion in debt. Operating cash flow is $11.26 billion and book value per share is $50.74. The company pays an annual dividend of $2.56 per share for a yield of 2.80%. The dividend payout ratio is 42%.

The company's shares have fallen 25 percent since they reached a high of $115 in 2011. During this time current CEO Stephen Chazen and Irani clashed over the direction of the company. Chazen wanted the focus to be on North America, whereas Irani advocated international expansion. Now Chazen is free to re-focus the company and a breakup is likely.

Occidental could be broken up into four separate companies. Those companies could be a U.S. crude producer, international oil and gas company, chemicals manufacturer, and a pipeline and logistics concern. According to Fadel Gheit, an analyst at Oppenheimer & Co.,

Each separate and standalone entity would be very competitive and highly valued in its own sector.

If Chazen doesn't follow through and create shareholder value, look for the activists to possibly band together and drive change at the company. Right now, everyone knows that Occidental is worth more than its current trading price of around $92.

Assessment

All 4 companies represent undervalued situations. It's only a matter of time before a catalyst emerges and we see higher prices. Higher prices could come from an activist or a takeover. Either way, look for higher prices ahead.

Source: 4 Undervalued Energy Stocks Ripe For Activism Or A Takeover