6 Potential Takeover Targets in the Energy Sector

by: Rougemont

Just a few days ago, BHP Billiton Ltd., (NYSE:BHP) agreed to buy Petrohawk Energy Corp. (NYSE:HK) for $38.75 per share in a deal valued at about $12.1 billion in cash. Petrohawk stock surged about $15 per share or more than 60% when the deal was announced. Gains from owning a stock in a company that receives a takeover offer can add some serious value to your portfolio. With many corporations loaded with huge amounts of cash on their balance sheets and earning very little interest, there is no doubt more deals will be made. With that in mind, here are a few companies that have takeover potential:

Range Resources (NYSE:RRC) shares are trading at $64.30. Range is engaged in natural gas exploration and production. The 50-day moving average is about $55.58 and the 200-day moving average is $49.46. Earnings estimates for RRC are about 96 cents per share in 2011, and $1.55 for 2012.

Why Range could be an attractive target: RRC might be an interesting target for a major oil or natural gas company. These shares have been considered to be a buyout target by many. Range Resources is a top takeover candidate according to Morningstar. These shares have surged in the wake of the Petrohawk deal, so I would wait for pullbacks before making a new investment here.
Syntroleum Corp. (NASDAQ:SYNM) is trading for $1.35. Syntroleum develops and markets synthetic fuels. This includes diesel fuels, heating oil, aviation fuels, lubricants, naphtha, etc. The 50-day moving average is about $1.66 and the 200-day moving average is $1.82. SYNM recently did a secondary offering at $1.58 and shorts piled on to drive this stock lower. However, insiders have recently bought about 170,000 shares and the stock has been building a solid base around $1.35. Roughly 3.4 million shares are sold short right now, which could provide another upside catalyst as the shorts start to cover. The trading volume spiked up significantly when the secondary was announced weeks ago, but now the volume is returning back to normalized levels, which will make it harder for shorts to cover without causing the price to move up.
Why Syntroleum could be an attractive target: There are a numerous major oil and energy companies that could be interested in acquiring Syntroleum for the biofuel technology and growth potential. Syntroleum has a strong balance sheet and a market capitalization of not much more than $100 million. That makes this company very affordable to acquire. British Petroleum (NYSE:BP) believes biofuels will show strong growth in the future. Philip New, president of biofuels development at BP recently said "biofuels could eventually make up 9 percent of the global energy mix," which he said was about triple the current capacity. In addition, the International Energy Agency (IEA) says "...use of biofuels could play a foundational role in cutting carbon dioxide emissions from the transportation sector." The IEA said in a road map for a clean energy future that biofuels could grow from 2 percent of the total transport fuel mix currently to 27 percent by 2050. If biofuels are to become 9% to 27% of the fuel used in the future, you can imagine the enormous potential at Syntroleum. With the future looking bright for biofuels, there is a strong chance that Syntroleum will be acquired.
BMB Munai (NYSEMKT:KAZ) is trading around $1. BMB Munai is a independent oil and gas company based in Kazakhstan. These shares have traded as high as $1.22 in the last 52 weeks. KAZ has a book value of about $3.92 per share, (see more financial data here.) P1 reserves for KAZ are about 23 million barrels of oil (about 82 million in P2 reserves).
Why BMB Munai could be an attractive target: KAZ has already received a buyout offer from MIE Holdings, which values the company at about $170 million or roughly $1.40 per share. Under the terms of the agreement, KAZ shareholders would receive an initial cash payment of somewhere between $1.04 to $1.10 at the time of closing and be entitled to an additional payment later, according to this company statement: "The Company intends to make a second distribution to stockholders that could range up to approximately $0.30 per share following termination of the escrow...." This gives a total possible cash payout of around $1.40 per share, if you wait for the deal to close. Since KAZ is selling the operating subsidiary, it could be that in addition to the cash payments, KAZ shares will still be trading with some potential value, which could increase the returns for KAZ shareholders. Normally there is not a lot of money to be made after a buyout deal is announced, but because this deal has been structured to take longer to close than most deals, and because this is a small company that most investors don't know, there is upside of about 40% for anyone buying at $1, if the deal closes with about a $1.40 cash payout.
Weatherford International (NYSE:WFT) is trading around $22. Weatherford is a leading provider of equipment and services to the oil and gas industry, based in Switzerland. These shares have traded in a range between $12.34 to $26.25 in the last 52 weeks. The 50-day moving average is $22.64 and the 200-day moving average is $18.79. WFT is estimated to earn about $1.08 per share in 2011, and $1.66 for 2012.
Why Weatherford could be an attractive target: Analyst Daniel Miller at Gabelli & Co. says WFT has unique global positions to capitalize on the growing energy exploration and production activities in key markets, such as Russia and Iraq and explains why he thinks Weatherford is an attractive acquisition target.
Energy XXI (EXXI) is trading around $33.36. Energy XXI is a independent oil and gas company, based in Bermuda. These shares have traded in a range between $12.68 to $34.73 in the last 52 weeks. The 50-day moving average is $32.62 and the 200-day moving average is $30.12. EXXI is estimated to earn about 64 cents per share in 2011, and $2.55 in 2012.
Why Energy XXI could be an attractive target: Analysts see earnings estimates for EXXI jumping from 64 cents to $2.25 in 2012, as new wells come into play and rising energy prices boost profit margins. Also, this company should benefit as waiting times and regulations for drilling permits in the Gulf of Mexico improve. A UBS report states a larger oil and gas company might be a buyer for this company.
Copano Energy LLC (NASDAQ:CPNO) shares are trading at $34.28. Copano owns natural gas pipelines, and is based in Texas. The 50-day moving average is about $33.68 and the 200-day moving average is $32.41. Earnings estimates for CPNO are about 6 cents per share in 2011, and 90 cents for 2012.
Why Copano could be an attractive target: Many believe that natural gas will become an important solution for energy demands in the future. One analyst recently suggested that Copano could be a takeover target and implied that insiders might have increased their severance packages in the event the company was sold in advance of a possible buyout.
The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I am long SYNM, KAZ.
Disclaimer: Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.

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