Goldman Sachs recently revealed a shocking statistic when it comes to the largest energy stocks: Despite shale being the No. 1 source of future oil production, Big Oil owns less than 5% of the total amount of U.S. shale oil resources.
Which is why Goldman Sachs thinks that big oil is about to go shopping.
With the integrated energy majors boasting a combined war chest of $150 billion — $475 billion if you factor in the deferred $325 billion of planned capex spending — Goldman Sachs thinks just about anybody could be a buyout target right now.
Some, of course, are better suited than others. Goldman Sachs had an extensive list of just who it thinks could be the next in line for some mergers and acquisition activity.
Here are five such stocks on Goldman’s radar:
Energy Stocks in for M&A: Anadarko Petroleum (APC)
With operations in the Gulf of Mexico, Brazil and Africa, Anadarko Petroleum (APC) is one of the largest independent energy producers on the planet. APC’s holdings in North America’s biggest shale formations, however, might just grease the M&A wheel.
APC holds hundreds of thousands of acres in the Eagle Ford, Marcellus, Wolfcamp, Wattenberg and other shale fields. If it’s hot in the world of shale, then Anadarko has some exposure. And that shale helped APC on the production and reserve front. All in all, at the end of last year, APC had 2.86 billion barrels worth of oil equivalent (PDF) in proved reserves.
Those just happen to be the kind of reserves and oil production that a major like Exxon would want.
However, swallowing APC won’t be cheap. While APC has gotten less pricey as a result of lower oil prices and legal issues that drove shares down more than 35% in the past year, it still has a market cap of $36 billion and an enterprise value of $53 billion.
Still, that might be just digestible enough for the largest of the energy majors.
Energy Stocks in for M&A: Cabot Oil & Gas Corporation (COG)
When it comes to shale and energy stocks, first-mover advantage is critical. Cabot Oil & Gas Corporation (COG) was one of the first movers into the Marcellus Shale and is now one of the largest producers in the region, with record production and reserve growth. In fact, Cabot actually controls Pennsylvania’s top 16 wells by cumulative production.
On the oily flip side, COG has plowed headfirst into the Eagle Ford and over the course of the year has added 89,000 acres to its portfolio in the region. Those acres sit across some of the regions more oil-rich pieces of the Eagle Ford.
Huge reserves, good margins and great cash flows are some of the hallmarks of the mid-cap energy stock. But things haven’t exactly been rosy for COG.
The dual price decline in both natural gas and oil has crimped both operating earnings and Cabot’s share price over the last year. Today, COG’s market cap is only about $11 billion. That’s pretty easy to eat for many larger energy stocks — especially considering that valuable acreage position in tow.
Energy Stocks in for M&A: Range Resources (RRC)
It’s hard to believe, but the Marcellus’ reigning king can be had for just a song and dance. Range Resources (RRC) has a market cap of $7 billion — a market cap low enough to attract plenty of suitors, with plenty of reasons why someone should buy.
One million reasons, actually.
That’s the net acres that RRC holds in the prolific shale formation. What’s more, those acres sit across the Marcellus’ vast liquid-rich window. That means Range Resources is able to pull out higher-valued/priced shale oil and natural gas liquids than other operators focusing strictly on dry gas.
Additionally, RRC has plenty of acreage where it’s able to tap the Marcellus as well as the Upper Devonian and Utica shales. These formations lie above and below the Marcellus, and in some areas RRC can use one drilling rig to hit all three. That has allowed Range Resources to realize low drilling costs and some of the best margins around.
When you add in several of the other positives for RRC — such a low debt and ample liquidity — it’s hard to see how RRC hasn’t already been bought out.
Energy Stocks in for M&A: Noble Energy (NBL)
Fresh off its own bit of M&A, Noble Energy (NBL) was also on Goldman Sachs’ energy stocks buyout list. And it’s easy to see why, what with plenty of quality assets and all.
Those assets include wells in the Gulf of Mexico, its legacy position in the Niobrara, a profitable joint venture in the Marcellus, huge natural gas fields in Israel and a growing presence in the Eagle Ford — all of which scream steady cash flows, rising production and abundant reserves.
That case is strengthened further by NBL’s buyout of Rosetta Resources, which added additional acreage in the Denver-Julesburg Basin and Marcellus Shale, as well as significantly expanded NBL’s presence in the Permian. Noble will gain about 1 billion barrels of oil equivalent in resource potential from the buy, and will be able to boost its production by 15% annually by 2018. This is in addition to the extra liquidity gained in the deal.
The buyout basically added more fuel to the thesis of why a larger energy company would want to snag Noble. And with a reduced $14 billion market cap thanks to lower oil prices, NBL stock could be on the auction block soon.
Energy Stocks in for M&A: Pioneer Natural Resources (PXD)
Like many energy stocks, Pioneer Natural Resources (PXD) shares have basically been cut in half over the last 52 weeks. And like the rest of the sector, PXD has been a victim of lower energy prices, weakening cash flows and, in Pioneer’s case, a major activist investor who is short the stock.
That huge decline sets up the potential for a blockbuster deal in the energy patch, according to Goldman Sachs.
The Permian Basin is one of the major shale regions still kicking out profits for energy firms. And when it comes to the Permian, PXD is the biggest game in town. The E&P firm has a staggering 785,000 gross acres and more than 7,000 wells in the region. The bulk of those wells are conventional ones that continue to spit out steady production and cash flows.
However, Pioneer has spent the last few years fracking and horizontally drilling on that acreage. That’s where the real money can be made. By rehitting these older sites with new technology, PXD or its suitor can extract additional barrels from that huge acreage profile.
At a market cap of $19 billion, PXD isn’t cheap, but it is certainly doable for a larger energy stock looking to load up in the Permian.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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