Commodities Today: Acquisition Targets In The North American Oil Field

Includes: EOG, KOG, OAS, ROSE, WLL
by: Matthew Smith

We have seen a drop-off in M&A activity this year for the oil and natural gas names we follow, however there has been an increase in joint ventures which require little money upfront. That has changed the game a bit and simply highlights the progression of the shale boom from a fledgling industry to one which has matured and now requires massive amounts of capital to continue progressing.

This is why we have been so bullish on oil E&P names over the past year and continue to see value in the field. As the glut of available acreage dries up we will see more acquisitions and as more and more companies come to North America from overseas it only hastens this move. And that is why we were so happy to see the news that Repsol (OTCQX:REPYF) was looking to North America for acquisition opportunities.

Chart of the Day:

RBOB gas has broken $2.70/gallon, which is good for the consumer and could lead to an improving business climate for apparel retailers.

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Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1320.50/ounce, up by $2.70/ounce
  • Silver: $21.93/ounce, down by $0.079/ounce
  • Oil: $106.04/barrel, down by $0.55/barrel
  • RBOB Gas: $2.6824/gallon, down by $0.0342/gallon
  • Natural Gas: $3.741/MMbtu, up by $0.003/MMbtu
  • Copper: $3.2305/pound, up by $0.0085/pound
  • Platinum: $1439.60/ounce, down by $1.60/ounce

Oil & Natural Gas

The Wall Street Journal yesterday reported (see article here) that Spain's Repsol is hunting for an acquisition in the North American oil patch which would put many of the names we follow into play. Apparently the Spanish company is seeking companies heavy on oil production and less so on natural gas production which leads U.S. to believe that they will focus on players in the Bakken, Wattenberg, Permian and Eagle Ford. According to the reports we also know that they are looking to spend between $5-10 billion which further tightens the field.

The first name which comes to mind, although currently trading below the $5 billion market capitalization threshold (keep in mind it would need to trade say 20-30% below that to meet the threshold after the premium is paid) is Kodiak Oil & Gas (NYSE:KOG). We have highlighted the company numerous times over the years and in the past few weeks while also discussing their inability to find a buyer last year. The Wall Street Journal highlighted the company as a possibility along with Whiting Petroleum (NYSE:WLL), whose market capitalization falls within the $5-10 billion range and had a failed attempt at a sale too.

Both would make excellent buys as they have solid production numbers and continue to build production as they develop their leaseholds. The drilling inventory would be enough to keep Repsol busy too and that is an important element of an acquisition here, the ability to continue to grow production years into the future.

Oasis could prove to be a nice target for Repsol to use in order to enter the Bakken in a big way. Reasonably priced and plenty of value still on the table.

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Source: Yahoo Finance

Fitting within that bottom range of the spectrum is Oasis Petroluem (NYSE:OAS) which we recently covered due to their acquisition of additional acreage in the Williston Basin located in the prolific Bakken. It was a great buy and vastly increased the company's acreage position in the play. They have plenty of drilling locations now and still have a healthy balance sheet, which would make an acquisition all the more attractive for a company like Repsol. Now would management want to sell out at say $5 billion for a roughly 25% premium? After their most recent deal probably not. But this is one of the most appealing companies out there with plenty of value yet to be realized from their acreage. Everyone likes to come out a winner when buying an asset and this one would most certainly enable a buyer to do many of the things (increase oil production, possibly increase the number of drilling locations and benefit from economies of scale within one area) that result in cost savings.

Our favorite name with multiple areas of interest is Rosetta Resources and would be the name we purchased if it was our decision to make. Less upside, but less risk too.

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Source: Yahoo Finance

But we think that another possible name, although less likely once again due to their market cap and the management team, could be Rosetta Resources (NASDAQ:ROSE) which has excellent acreage in the Eagle Ford shale and earlier this year purchased a total of 53,300 net acres in the Permian Basin. What is better is that 40,200 of those net acres are in the Delaware Basin, the play which EOG Resources (NYSE:EOG) has been getting excited about and really pushing with analysts during conference calls and various industry conferences. The deal, worth nearly $770 million, was meant to give the company even more exposure to oil and other liquids and that is precisely what everyone else is looking for, including Repsol.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.