Many oil companies are flush with cash, which is earning little to no returns for shareholders. With oil and equity prices trading at what might be bargain valuations when considering a longer-term outlook, mergers and buyout deals could heat up in the coming months. For example, Magnum Hunter Resources Corporation (MHR) recently closed a $311 million acquisition in which it purchased property located in the Williston Basin of North Dakota from Baytex Energy Corp. (BTE). Companies that have cash and access to the debt markets are likely to accelerate any buyout deals that were being contemplated, because the window to buy at currently low valuations might not last for long. While retail investors are likely to get distracted and easily discouraged by short-term fluctuations in the stock market and oil prices, companies with strong management are more likely to take a longer-term view and act on what might be a golden opportunity for merger and acquisition deals. Here are a few companies that have a history of M&A activity, and/or the potential for a future deal:
Chesapeake Energy Corporation (CHK) shares have been slammed due to concerns over recently disclosed dealings between the CEO, Aubrey McClendon and the company. There are SEC inquiries into these issues now, and it could take time for any resolution. However, some analysts believe that the company could be a takeover target due to its low valuation, or it might sell assets that could unlock shareholder value. Analysts have cited Exxon Mobil (XOM) as a likely buyer for the company or possibly some of its assets which includes interests in the Barnett Shale, the Haynesville and Bossier Shales, the Fayetteville Shale, the Marcellus Shale and the Eagle Ford Shale. Since this company is controversial with investors right now, and considering that there could be another "shoe to drop", this stock looks very speculative and it has a potentially higher-risk profile. One famed investor, Carl Icahn recently announced an investment in the company, and since he is an activist investor, his involvement might help prompt a deal. Some sort of buyout or asset sale looks likely as the company tries to regain its footing with investors.
Here are some key points for CHK:
- Current share price: $15.58
- The 52 week range is $13.32 to $35.75
- Earnings estimates for 2012: 56 cents per share
- Earnings estimates for 2013: $1.79 per share
- Annual dividend: 35 cents per share which yields 2.1%
Petroquest Energy, Inc. (PQ) has merger and acquisition deals in its past, since what was known as Optima Petroleum merged to become Petroquest Energy. Former founder and chairman of Optima Petroleum, Robert Hodgkinson, is now CEO of Dejour Energy (DEJ) which is a high-potential oil and gas company that could also be poised for M&A activity, especially considering that it is about to embark on major new drilling programs at its Kokopelli project. Mr. Hodgkinson has a history of making deals. He was also CEO of Australian Oil Fields, which later merged to become Resolute Energy Corporation (REN). Since Petroquest is no stranger to M&A deals, and because the valuation of the company is at a low point, it could be an attractive candidate for a deal, to either acquire or be bought. The company has significant oil and gas reserves and is producing from projects in East Texas, Arkoma Basin, South Louisiana and the shallow waters of the Gulf of Mexico. Petroquest has made acquisitions in the East Texas Basin, and it expects growth from its Eagle Ford and Niobrara plays. Dejour Energy also has about 26,000 acres in the Niobrara range. With all the overlapping interests, geographical proximity and a shared CEO history with a penchant for M&A, it's possible a deal could come together with one or more of these companies.
Here are some key points for PQ:
- Current share price: $4.64
- The 52 week range is $4.50 to $8.70
- Earnings estimates for 2012: 10 cents per share
- Earnings estimates for 2013: 28 cents per share
- Annual dividend: none
Weatherford International (WFT) is a leader in offshore drilling and other services to the oil and gas industry. This company is based in Switzerland and it focuses on international and offshore projects which makes it less susceptible to the current weakness some land-based oil services companies are seeing as a result of low domestic natural gas prices. Weatherford is poised to benefit from growth in offshore drilling and from new oil discoveries in emerging market countries. This focus and growth potential is one reason why some analysts and investors have considered Weatherford to be a possible takeover target in the past. Another reason is low interest rates which makes acquisitions cheaper to fund through debt markets. Finally, valuation is a key factor in takeover deals, and with Weatherford now trading near 52-week lows and for less than book value of $13.05, now could be the time for a deal. Analysts expect the company to earn about $1.70 in 2013. This would put the forward price to earnings ratio at just about 6.9 times earnings. In another sign that the valuation is too low, multiple insiders have recently been buying the stock and in May, 2012 about 19,000 shares were purchased at prices ranging from $12.60 to $13.90 per share. The stock price is even cheaper now, and whether or not a deal arises, these shares could be poised for a significant rally from the currently oversold levels.
Here are some key points for WFT:
- Current share price: $11.75
- The 52 week range is $10.85 to $22.76
- Earnings estimates for 2012: $1.22 per share
- Earnings estimates for 2013: $1.70 per share
- Annual dividend: none
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.