With oil basically imploding over the last seven months or so, the damage has been widespread. And typically during periods of duress for shale oil — or, really, for any stock sector — the name of the game is consolidation.
As share prices for smaller, less capitalized shale oil drillers have plunged much farther than larger rivals, merger and acquisition activity should begin to pick up among the energy stocks. Many of these firms still have quality assets that can be exploited by larger energy stocks companies and more efficiently.
And there are some signs that rising M&A activity could be starting already.
Energy stocks have issued more $9 billion worth of new shares since the beginning of the year. Those issuances, according to analysts, have been a thawing of a freeze that started back when OPEC first announced it wasn’t cutting it production.
More importantly, the kind of serious cash that some energy stocks are raising has historically been a precursor to the start of M&A activity in the industry.
So how can an investor profit? By betting on the smaller energy stocks that make the most sense as M&A targets.
While there’s no guarantee that these four firms will get bought out in today’s shale oil market, there’s still a high probability.
Energy Stocks to Buy as Shale Oil Suffers: Cabot Oil & Gas Corporation (COG)
For mid-cap energy stock Cabot Oil & Gas Corporation (NYSE:COG) things haven’t been going so well in the shale oil patch. COG has struggled under the weight of lower natural gas prices for some time, but now the recent rout to oil prices has the energy producer really coming under hard times.
For its latest earnings report, Cabot reported a net loss of $221.8 million, or 54 cents per share during the fourth quarter. Those poor earnings and the lower energy price environment have helped bring its share price down about 28% from its peak.
That’s helped fuel buyout and M&A talk around COG stock shares.
And there’s certainty reason to believe that COG could get bought out. Cabot is a major player in two of the best fields for their respective commodities — the Marcellus and the Eagle Ford. Cabot has approximately 200,000 acres in the dry gas window of the Marcellus shale, while holding 89,000 acres in the oil-rich Eagle Ford. Those acreage positions are pretty desirable for many larger producers looking to expand their production.
And at a market cap of just $11.7 billion, COG is the right size to swallow up.
Energy Stocks to Buy as Shale Oil Suffers: Gulfport Energy Corporation
Since the shale and energy stocks collapse, Gulfport Energy Corporation (NASDAQ:GPOR) has fallen around 39% from its peak. That fall and its $3.9 billion market cap make GPOR an interesting M&A candidate — even more so as one considers other statistics related to the shale driller.
Namely, its recent 305% increase to its reserves over 2013’s numbers.
GPOR owns acreage and drilling interests across the country in some of the largest shale formations — including the Niobrara and the Permian Basin. However, it’s large leadership-sized position in Ohio’s Utica that has been the firm’s real driver of growth. Those 179,000 acres span the field’s wet gas/condensate and dry gas windows. That’s helped Gulfport see its reserves rise to 933.6 billion cubic feet.
That huge reserve position in the Utica has some analysts looking at GPOR as a prime buyout candidate. After all, snagging up the small cap instantly gives a firm a commanding position in the relatively ignored shale play. It’s a profitable positon, at which Gulfport continues rack up some impressive earnings even as oil, natural gas and natural gas liquids prices fall.
For investors, GPOR shares mean you are getting the chance at a higher-priced buyout or a quality shale producer on the cheap if that merger doesn’t come.
Energy Stocks to Buy as Shale Oil Suffers: Energen Corporation (EGN)
Since selling its natural gas utility business to the Laclede Group Inc (NYSE:LG) in August, Energen Corporation (NYSE:EGN) has become focused on one thing — shale drilling. More specifically, shale drilling in the prolific Permian Basin.
The Permian Basin is actually several distinct geographic layers staked up on top of one another. Think of it as a big, seven-layer wedding cake. That makes it possible for energy stocks operating in the region to tap multiple shale layers from just one well pad. That makes it one heck of a profitable play for energy producers.
And EGN is no different.
Energen has roughly 775 million barrels worth of oil, natural gas and NGL reserves as well as another 2.5 billion barrels of oil-equivalent contingent resources. Even at today’s selling prices, that’s a heck of a lot of moola sitting in the ground for EGN. And with just a $4.7 billion market cap, it could be very easily someone else’s moola too.
With a price-to-earnings ratio of only 8.3, it could be investor’s big payday as well. Shares of EGN are certainly cheap enough.
Energy Stocks to Buy as Shale Oil Suffers: Diamondback Energy Inc (FANG)
Diamondback Energy Inc (NASDAQ:FANG) is a relatively new energy stock, holding its IPO in late 2012. However, despite being new, some analysts have already suggested that FANG could be a target of M&A in the current environment.
That’s because like EGN, FANG operates on some prime acreage in the Permian Basin. Those 65,000 acres are located in some of the Permian’s up-and-coming sweet spots and promise big-time production over the longer haul at a low price.
Already, FANG has realized increased reserves on its acreage. For the latest reported quarter, Diamondback saw a 77% year-over-year increase in its total reserves, with the vast bulk of those reserves being higher-priced oil and natural gas liquids.
The real key is that FANG managed to replace almost 800% of its production. That’s a huge selling point for a larger firm looking to snag up acreage in the Permian. That basically means that by buying FANG, a larer firm can increase its own production and still find more oil in the ground than they are taking out.
And with FANG shares dropping 22% since peaking at $93, the chance to take out Diamondback could be at hand. For only $4.3 billion, larger E&P firms get some quality acreage in one of the best performing plays in the nation.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.