Many of the major energy players are busy searching the world for more oil and natural gas reserves. Barron's Dimitra Defotis thinks they should be looking closer to home, as U.S. shale fields hold enormous potential as a source of energy.
BP (NYSE:BP) is already charting a course in this direction. In July, it made a deal to pay Chesapeake Energy (NYSE:CHK) $1.75B for land in Oklahoma's Woodford Shale. Exxon Mobil (NYSE:XOM) would do well to follow suit.
Yet smaller U.S. oil and gas companies with shale assets, like St. Mary Land & Exploration (NYSE:SM) and Quicksilver Resources (NYSE:KWK), are finding that their share prices don't reflect the value of the companies' shale holdings. The reason is that investors are concerned an oversupply of natural gas could cause prices to dip below $6, roughly the threshold for shale-gas profitability.
Barron's believes demand is likely to stay strong, so oversupply shouldn't be a problem. And for smaller companies that can't profitably invest in their shale assets, a buyout from a larger, well-capitalized company may be the best option for all parties involved. Neil McMahon, an analyst at Bernstein Research, says oil companies with limited debt are "licking their lips at the prospect of picking up cheap bargains." Even some smaller U.S. firms could become buyers in this environment, as XTO Energy (XTO) demonstrated with its recent purchase of $15B in shale assets.
St. Mary Land & Exploration (SM) has strong potential as a buyout target. Will Nasgovitz of Heartland Select Value Fund thinks the stock is worth $75, nearly twice its current trading price. Quicksilver Resources (KWK) could be a merger target, and Jefferies & Co. recently raised its one-year target price to $56 from its trading price of $24.