These Stocks Could Jump on Energy M&A

by Dan Burrows | November 9, 2012 12:06 pm

It’s been the quietest year for mergers and acquisitions in almost a decade, but if the rumors are true, that’s about to change — at least in the energy sector.

With the exception of Energy Transfer Partners‘ (NYSE:ETP[1]) $9 billion acquisition of Sunoco, there hasn’t been much heat or light on the deal front. Indeed, first-half M&A activity dropped 40% year-over-year to hit its lowest total since 2003, according to data from Mergermarket.

The energy sector, however, is ripe for some consolidation.

The Great American Energy Boom — thanks to new drilling technologies unleashing shale deposits — has the price of natural gas scraping the bottom of the barrel. Oil prices, meanwhile, have gotten stuck below $90 a barrel[2] on sluggish global demand and rising inventories.

That’s putting pressure on the smaller independent operators at the same time some of the biggest companies need to play catch-up on finding or acquiring new resources.

The entire market certainly is primed for more deal activity when you consider how much capital is available for deployment. Companies are sitting on record levels of cash[3] and the bond market is more than favorable, offering all-time low borrowing rates.

Put it all together, and it makes some of the latest rumors and speculation about potential deals in the energy sector more credible than ever.

For example, Dow component Chevron (NYSE:CVX[4]) offered $67.50 a share to acquire Devon Energy (NYSE:DVN[5]), according to media reports[6]. Given the scramble to pick up assets amid declining output, that makes sense.

It’s the same logic behind analysts’ conclusion that Dow component Exxon Mobil (NYSE:XOM[7]) needs to to make some acquisitions. The world’s largest oil producer by output is in danger of losing its No. 1 position to Russia’s[8] Rosneft (PINK:RNFTF[9]) — and might be forced to buy what it can’t find itself, analysts say[10], as the company lags behind rivals in making new oil and gas discoveries. Logical targets for Exxon Mobil include Anadarko Petroleum (NYSE:APC[11]), EOG Resources (NYSE:EOG[12]) and Apache (NYSE:APA[13]).

Elsewhere in the sector, Statoil has (NYSE:STO[14]) is rumored to have bid $65 a share for Whiting Petroleum (NYSE:WLL[15]).

Be forewarned that it is always risky to play individual names on the basis of deal whispers. The Street is a snake pit of unfounded rumors, and even when they’re true, the deals don’t always come to fruition.

But there’s no question the energy sector is due for consolidation. And anyone with broad exposure to the industry — say, through the Energy Select Sector SPDR (NYSE:XLE[16]) or iShares Dow Jones US Energy ETF (NYSE:IYE[17]) — is sure to benefit.

No, you won’t get that same huge pop you would betting right on a possible target — but then, you won’t get burned by being wrong or wrung out by the professional arbitrageurs, either.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. ETP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETP
  2. below $90 a barrel: http://investorplace.com/2012/10/oil-prices-below-90-but-for-how-long/
  3. sitting on record levels of cash: http://slant.investorplace.com/2012/11/cash-stockpiles-might-be-meaningless-on-wall-street/
  4. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  5. DVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVN
  6. according to media reports: http://www.benzinga.com/trading-ideas/long-ideas/12/11/3063128/benzingas-m-a-chatter-for-tuesday-november-6-2012
  7. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  8. losing its No. 1 position to Russia’s: http://investorplace.com/2012/10/bp-and-rosneft-one-sale-two-winners/
  9. RNFTF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RNFTF
  10. analysts say: http://www.bloomberg.com/news/2012-10-26/exxon-seen-boosting-growth-with-anadarko-to-eog-deals.html
  11. APC: http://studio-5.financialcontent.com/investplace/quote?Symbol=APC
  12. EOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EOG
  13. APA: http://studio-5.financialcontent.com/investplace/quote?Symbol=APA
  14. STO: http://studio-5.financialcontent.com/investplace/quote?Symbol=STO
  15. WLL: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLL
  16. XLE: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLE
  17. IYE: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYE

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