At the end of the last quarter, oil giant Chevron (CVX) was sitting on a cash hoard of $21.21 billion with only $9.87 billion in long-term debt - fueling speculation that company could use some of that cash to make acquisitions. After all, Chevron has a solid portfolio of international assets but domestically the company lacks a sizable presence compared with fellow supermajor Exxon Mobil (XOM). On the other hand, Chevron's lack of exposure to domestic natural gas has worked out well for both the company and for investors now that the price of natural gas has collapsed to record lows - meaning now might be a good time for Chevron to make a move and get into natural gas at the low end.
It should be noted that Chevron has already made a few acquisition moves domestically. In February 2011, Chevron acquired Atlas Energy for $3.2 billion to obtain 486,000 acres in the Marcellus Shale and 623,000 acres in the Utica Shale, which cover parts of Ohio, West Virginia, Pennsylvania and New York. A few months later, Chevron acquired drilling and development rights for another 228,000 acres in the Marcellus Shale.
In addition, it's worth noting that Chevron is already the fourth largest producer in the Permian Basin of West Texas and New Mexico, which has the second largest oil reserves in the USA after Alaska, plus it's active in the Central Valley of California and its one of the leading producers in the deepwater Gulf of Mexico. Hence, Chevron could decide to bulk up its portfolio in some of these locations.
So just what oil and gas stocks would be on Chevron's shopping list? A potential list might include the following oil and gas stocks:
- Chesapeake Energy (CHK). With Exxon Mobil being the largest natural gas producer in the United States, it might make sense for Chevron to go after Chesapeake Energy - the troubled number two natural gas producer. Besides weak natural gas prices, Chesapeake Energy was hit this year by a flurry of corporate governance issues surrounding the activities of its colorful CEO and founder Aubrey McClendon who was mixing too much personal business in with company business. The Board of Chesapeake Energy has since remedied the situation by removing Aubrey as Chairman and passing other measures to keep him under better control but that was not before the company's stock took a hit plus its facing both IRS and SEC probes. For those reasons, I doubt that Chevron would want the whole company plus one observer has speculated that there would be "too many egos and headaches involved." On the other hand, Chesapeake Energy is busily raising cash to pay down debt by dumping assets that Chevron could just as easily make a bid for and spare itself the headaches of acquiring the whole company.
- McMoRan Exploration (MMR). Active in the deepwater Gulf of Mexico, some observers have speculated that McMoRan Exploration could be an acquisition target of Chevron as the two companies are already working together on a deepwater well and have joint bids for more leases. Moreover, it would be a win-win deal for all as McMoRan Exploration no doubt has valuable seismic data about the Gulf but not necessarily the financial capacity to drill deepwater wells that could easily cost a few hundred million dollars to complete.
- Bakken Formation Players. Chevron is noticeably absent from the Bakken formation play covering parts of Montana, North Dakota and Saskatchewan. For that reason, it might make sense for it to consider buying Bakken players like Continental Resources (CLR) which has around a $14 billion market cap and is active in other areas of the mid-continent or Hess (HES) which has a market cap approaching $18 billion plus its active globally. Of course, those might be rather large targets even for Chevron to digest.
But, it's worth noting that smaller Bakken players with big acreages have been called ripe for acquisition thanks to cheap valuations because poor infrastructure makes it harder and more expensive to transport oil out of that region to major markets. That will no doubt change in the near future as more pipelines and railroads are planned for the region but in the mean time, Bakken players like Kodiak Oil & Gas (KOG), Northern Oil & Gas (NOG) and Oasis Petroleum (OAS) have market caps in the $1 to $3 billion range while Whiting Petroleum (WLL) has a market cap approaching $6 billion. All are probably right now undervalued in terms of their assets and could tempt Chevron if it seeks to gain a foothold in the region.
- Other Permian Basin, Marcellus Shale or Utica Shale Players. Chevron could easily increase its presence in the other onshore plays where it's already active by either buying more assets in those locations or an entire player like it did when it acquired Atlas Energy.
- Other Unconventional Plays. There are plenty of other unconventional plays out there in both the United States and Canada that Chevron could want to grab a piece of or acquire a player who is active in them but given that the company is headquartered on the edge of the San Francisco Bay Area, there would be some plays (like getting more involved in the Canadian oil sands, etc.) that could bring more headaches than profits for the company.
Of course, I should point out that Chevron has not exactly announced to the world that it's seeking out domestic acquisitions for its cash hoard. Instead, company officials have said they need to keep the cash in reserve as they complete major projects but its worth remembering that a company as big as Chevron can probably borrow at very favorable interest rates in the current environment. Hence, pressure from investors may grow for Chevron to do something with its cash and it does make sense for it to make more acquisitions to shore up its domestic oil and gas portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.