Oil Stocks: Analysts Pick 4 Potential Takeover Targets

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Includes: RIG, RRC, SD, UPL
by: Hawkinvest

Even though 2012 is just getting started, a few major buyout deals have surfaced and this trend is likely to continue throughout the year. Many corporations currently have record levels of cash on the balance sheet and for the most part, that money is earning very little. For many companies, the best way to create shareholder value is to use this cash to buy a competing company or a fast-growing business that can add synergy to existing services or products. Since stocks that are the subject of a takeover bid often surge, it makes sense to own at least one or two stocks that could become the next acquisition target. With that in mind, here are a few stocks that investment analysts at Morningstar believe could be buyout candidates:

Range Resources Corporation (NYSE:RRC) is a Texas-based oil and natural gas company. According to the Range Resources investor presentation (pdf), the company achieved a 14% increase in total proved reserves in 2011. The company has also protected itself and shareholders by hedging 75% of the natural gas production for 2012, at $4.45. This company has successfully increased reserves every year since 2006. Range Resources plans to drive shareholder value in 2012 by exploiting its Marcellus, Upper Devonian, Utica, and other shale plays. The Marcellus shale range has historically provided extremely high rates of returns when compared with other shale plays, so it makes sense for this company to target it. Because of its high-potential Marcellus shale assets, management team, and solid history of reserve increases, this company could be an attractive takeover target.

Here are some key points for RRC:
Current share price: $62.82
The 52-week range is $46.18 to $77.24
Earnings estimates for 2011: $1.06 per share
Earnings estimates for 2012: $1.19 per share
Annual dividend: 16 cents per share, which yields .3%

Ultra Petroleum Corp. (NASDAQ:UPL) is developing natural gas and oil assets. This company has continued growth potential as it is focused on the Marcellus shale range. It is a low-cost producer of natural gas, which is critical to remain competitive in this industry. Ultra has performed well in terms of operations, but the stock has been extremely volatile. In 2008, it traded for close to $100 per share, then dropped to a range of about $30 to $50 per share. More recently, it has dropped from $33 per share to just $23.59, as natural gas prices have plunged. However, this low valuation could make it more attractive to potential suitors. In the most recent quarter, Ultra reported a profit of 72 cents per share, and operating cash flow of $1.67 per share. Net production from the Marcellus range increased by about 155% when compared with the third quarter of 2010. This stock appears to be forming a bottom at current levels, but it only makes sense to average into this stock as it may remain weak in sympathy with natural gas prices for awhile.

Here are some key points for UPL:
Current share price: $23.59
The 52-week range is $23.09 to $51.20
Earnings estimates for 2011: $2.58 per share
Earnings estimates for 2012: $2.02 per share
Annual dividend: none

Sandridge Energy (NYSE:SD) is a Oklahoma-based oil and natural gas company, with projects in Texas, the Gulf of Mexico, and the Permian Basin. This company recently announced that it would acquire Dynamic Offshore Resources, LLC for nearly $1.3 billion. This appears to be a smart move and it's a way for Sandridge to shift the focus to oil since natural gas prices are expected to see continued weakness. The announcement states: "These oil rich assets will add reserves, production and cash flow at an attractive valuation that is consistent with the achievement of Sandridge's three year plan to triple EBITDA and double oil production while lowering its debt to EBITDA ratio." The addition of these oil assets will help diversify the company and it also could make it a more attractive buyout candidate. The stock is trading for about half the 52-week high, so it even has some rebound potential in the absence of a takeover.

Here are some key points for SD:
Current share price: $7.46
The 52-week range is $4.55 to $13.34
Earnings estimates for 2011: a loss of 4 cents per share
Earnings estimates for 2012: a profit of 7 cents per share
Annual dividend: none

Transocean (NYSE:RIG) is one of the largest offshore oil and gas drilling contractors. This company has a fleet of about 138 mobile offshore rigs that it either owns or operates. Transocean is still working through claims related to the BP oil spill and this along with other factors has put pressure on the stock. Transocean is trading way below the 52-week high and it appears to have bottomed-out in recent weeks. One remaining issue is that the dividend could be cut, since it is higher than earnings expectations for the next couple of years. Transocean does have a significant amount of debt, about $11 billion worth. Based on the debt levels and the current earnings estimates, it seems only prudent to cut the dividend. If this happens, it could be a final event before investors can feel comfortable in knowing that further downside is probably limited. Transocean has significant rebound potential in the long run, however, it's likely to remain soft until the BP spill issue and a potential dividend cut are more fully resolved. A takeover is also more likely to occur when more clarity appears for this company. The stock looks attractive on dips to recent lows around $42 or less.

Here are some key points for RIG:
Current share price: $50.21
The 52-week range is $38.21 to $85.98
Earnings estimates for 2011: $1.49 per share
Earnings estimates for 2012: $2.94 per share
Annual dividend: $3.16 per share, which yields 6.4%

Data sourced from Yahoo Finance. No guarantees or representations are made.


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

Disclaimer: 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.