As we have been speculating in this space for most of 2011, the energy sector is ripe for consolidation. And as we opined last week, it looked like that consolidation might quicken in pace in the fourth quarter into early 2012 as well.
It certainly appears to be the case today as roughly $29 billion in energy deals have been announced. Of course the fun thing about Merger Mondays is that they always prompt the question “Who is next?” Meaning what companies might be next to be acquired in the energy space.
As smart investors know, it can be dangerous to buy an individual stock with the hope that the company will be acquired. Rather than do that, it can be more prudent to find energy ETFs with holdings that include possible takeover candidates. Here are five to get you started.
First Trust ISE-Revere Natural Gas Index Fund (FCG): We mentioned FCG last week as a play for the rather persistent rumor that Range Resources (RRC) is a takeover target, but when you look at the ETFs lineup, there are probably three or four other holdings that are credible candidates to be acquired. Cabot Oil & Gas (COG) and EOG Resources (EOG) among them.
PowerShares S&P Small-Cap Energy ETF (PSCE): Once upon a time, Brigham Exploration (BEXP) was a top holding in PSCE. The ETF rebalanced and Brigham moved out because of its market cap no longer fit the small-cap designation, but that didn't stop Statoil (STO) from acquiring Brigham for a nice premium. Even with Brigham gone, PSCE still has a few potential takeover candidates.
Market Vectors Coal ETF (KOL): The severely depressed valuation on Walter Energy (WLT) and an activist shareholder have KOL at the forefront of energy sector takeover talk. Arguably, Alpha Natural Resources (ANR) and Patriot Coal (PCX) could find themselves to be the focus of same takeover chatter at some point.
iShares S&P Global Infrastructure Index Fund (IGF): The iShares S&P Global Infrastructure Index Fund isn't a pure-play energy ETF, but we like it as a takeover play because its almost 20% allocation to the energy sector is devoted primarily to pipeline operators and that's the epicenter of today's M&A fever. Williams (WMB) could be in play in the future if pipeline consolidation continues and that stock is featured in IGF.
iShares Dow Jones U.S. Oil Equipment Index Fund (IEZ): One member of the iShares Dow Jones U.S. Oil Equipment Index Fund, Complete Production (CPX) recently agreed to be acquired by Superior Energy (SPN), another IEZ holding. The oil services sector is primed for consolidation and IEZ is chock full of both buyers and targets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.