The Sunoco Takeover: Which Oil Sector Stocks Could Be Next?

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 |  Includes: COP, ETP, SUN, TSO, VLO, WMB
by: Trade In Mexico

A number of merger and acquisitions deals have been announced, and some major transactions were in the oil and energy sector. Specifically, Energy Transfer Partners (NYSE:ETP) agreed to buy Sunoco, Inc. (NYSE:SUN) for about $5.3 billion. This deal makes Energy Transfer Partners an even larger player in the pipeline business and both stocks rose when the news came out.

In another energy deal, Delta Airlines (NYSE:DAL) is reported to be buying a refining business from ConocoPhillips (NYSE:COP). This is the second deal involving refinery assets in just a couple of days. When buyout deals are announced, stocks can see exceptional gains. The deal for Sunoco took those shares up over 20% in a single day. Those types of returns would even be great for an entire year and that's why it makes sense to consider investing in companies that could be takeover targets. Here is a closer look at some of the companies involved in these recent deals, and a couple more that are considered to be takeover targets:

Sunoco, Inc. is a leading refiner of petroleum products and it also operates energy pipelines, and fueling stations. Refining margins have been under pressure, and that has caused some investors to lose interest in companies that have major refining operations. It looks like investors underestimated the value of this company and Energy Transfer Partners took advantage of the low valuation to make a deal that values this company for about $5.3 billion. Based on the details of this deal, Sunoco shareholders should receive about $50 for each share they own, and the deal could close in the 3rd or 4th quarter. Some analysts believe this deal could lead to a bidding war, with other offers coming in, so additional gains are possible.

Key Data Points For Sunoco From Yahoo Finance:

  • Current Share Price: $49.29
  • 52-Week Range: $27.76 to $49.52
  • Dividend: 80 cents per share which provides a yield of 2%
  • 2012 Earnings Estimate: $1.15 per share
  • 2013 Earnings Estimate: $1.67 per share
  • P/E Ratio: about 37 times earnings

Energy Transfer Partners is one of the largest natural gas pipeline and transportation services companies in the United States. If the deal for Sunoco goes through, it will get even bigger. Investors liked this deal and this stock also rose when it was announced. As the article above notes, there is always a chance another bidder will come in for Sunoco, and that could create volatility for these shares. Overall, this stock looks interesting for income investors as it offers a high-yield and some growth potential. These shares are overbought now, so it makes sense to wait for pullbacks between $46 to $47 per share.

Key Data Points For Energy Transfer Partners From Yahoo Finance:

  • Current Share Price: $49.53
  • 52-Week Range: $38.08 to $53.70
  • Dividend: $3.58 which provides a yield of 7.5%
  • 2012 Earnings Estimate: $1.80 per share
  • 2013 Earnings Estimate: $2.38 per share
  • P/E Ratio: about 27 times earnings

Here are a few other companies that some analysts and investors consider to be takeover targets in the energy sector:

Valero Energy Corp. (NYSE:VLO) is a lot like Sunoco in that it operates refineries along with fueling stations and convenience stores. This stock looks grossly undervalued by the market as it trades below $25 per share. Valero shares are now valued at just about 6 times earnings and it trades below book value, which is $29.50 per share. Just days ago, it was reported that private equity firm Carlyle Group was in talks to buy refinery assets from Sunoco, but now it might have to look at other companies-- possibly Valero, which has been considered to be a takeover target by some analysts and investors in the past. At any rate, Valero shares look too cheap to pass up on as it trades for a bargain basement valuation.

Key Data Points For Valero From Yahoo Finance:

  • Current Share Price: $24.70
  • 52-Week Range: $16.40 to $28.70
  • Dividend: 60 cents which provides a yield of 2.4%
  • 2012 Earnings Estimate: $3.89 per share
  • 2013 Earnings Estimate: $4.47 per share
  • P/E Ratio: about 6 times earnings

Williams Cos. Inc., (NYSE:WMB) owns a major network of pipelines, which provides natural gas transportation spanning over 15,000 miles. The company delivers about 14% of the natural gas used in the United States and its pipelines have the capacity to serve about 30 million homes. Williams also processes and stores natural gas but the pipelines could be the most interesting asset that could lead to a takeover. The company recently reported first quarter earnings of $423 million, or 70 cents per share, and it raised the dividend.

Key Data Points For Williams From Yahoo Finance:

  • Current Share Price: $34.03
  • 52-Week Range: $21.90 to $34.12
  • Dividend: $1.04 which provides a yield of 3.1%
  • 2012 Earnings Estimate: $1.44 per share
  • 2013 Earnings Estimate: $1.63 per share
  • P/E Ratio: about 23 times earnings

Tesoro Corporation (NYSE:TSO) has also been considered to be a takeover target from time to time. At the current valuation, it looks attractive whether or not a buyout occurs. Tesoro owns 7 refineries which have a combined capacity of approximately 665,000 barrels per day. It operates fueling stations under the Tesoro, Shell and USA Gasoline brands. Tesoro shares trade for about 6 times earnings, and it also trades below book value of $26.39 per share.

Key Data Points For Tesoro From Yahoo Finance:

  • Current Share Price: $23.25
  • 52-Week Range: $17.43 to $30.15
  • Dividend: none
  • 2012 Earnings Estimate: $3.83 per share
  • 2013 Earnings Estimate: $3.86 per share
  • P/E Ratio: about 6 times earnings

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.