It happens every year, and 2016 won’t be any different. Larger companies looking to add to growth in addition to that of the organic or internal variety scan the field for purchases and acquisitions that are easy to bolt on and could add returns in a timely fashion. This year the process may even speed up some as the market sell-off that happened through the first two months may have already put some companies in the sights of acquirers, despite the recent market rally.
In what is a yearly and very all-encompassing report, the analysts at RBC again go through every sector looking for possible takeover candidates. Last year the company’s takeover screens yielded 29 buyouts that were eventually acquired over the following 12 months.
One screen that should be of interest to many investors is the potential takeout candidates in the energy sector. After a brutal year for oil pricing, some companies may be looking very attractive to majors and the large exploration and production companies. We found four well-known stocks on the RBC list.
Diamond Offshore Drilling
Offshore drillers have been hit extra hard, and this leading stock is a possible candidate to be bought. Diamond Offshore Drilling Inc. (NYSE: DO) provides contract drilling services to the energy industry worldwide. It provides services in floater market, including ultra-deepwater, deepwater and midwater. The company operates a fleet of 32 offshore drilling rigs, comprised of eight ultra-deepwater, seven deepwater and eight mid-water semi submersibles; five jackups; and four drillships. It serves independent oil and gas companies, as well as government-owned oil companies. The company is a subsidiary of Loews.
Diamond trades at five times enterprise value (EV) to EBITDA and posts gross margins of 26%. These are the metrics that RBC uses when looking for potential takeover candidates. The company also boasts EBIT margins of 24%. The Thomson/First Call consensus price target for the stock is $19.13. The shares closed trading on Tuesday at $22.25
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Dril-Quip
This company made the list last year and remains in the buyout mix again in 2016. Dril-Quip Inc. (NYSE: DRQ) designs, manufactures, sells and services offshore drilling and production equipment for use in deepwater, harsh environment and severe service applications worldwide. The company provides subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors and diverters.
The company trades at 6.9 times EV/EBITDA and posted gross margins of 46%. The EBIT margin stood at 29%. The consensus price target is $58.15, and shares closed most recently at $58.96.
Hornbeck Offshore Services
This is another company that hits the RBC screens for the second year running. Hornbeck Offshore Services Inc. (NYSE: HOS) provides marine transportation, subsea installation and accommodation support services to exploration and production, oilfield service, offshore construction and the U.S. military customers. It operates offshore supply vessels (OSVs), multi-purpose support vessels (MPSVs) and a shore-based facility to provide logistics support and specialty services to the offshore oil and gas exploration and production industry in the U.S. Gulf of Mexico, Latin America and elsewhere.
The company’s fleet of U.S.-flagged OSVs and MPSVs support deep-well, deepwater and ultra-deepwater activities of the offshore oil and gas industry, such as exploration, field development, production, construction, installation, inspection, repair, maintenance, well-stimulation and other enhanced oil recovery.
Hornbeck trades at 5.7 times EV/EBITDA. It has gross margins of 31% and EBIT margins of 21%. The consensus price objective is posted at $8.86. The stock closed Tuesday at $9.46.
Nabors Industries
This company provides drilling and rig services. Nabors Industries Ltd. (NYSE: NBR) offers rig instrumentation, optimization software and directional drilling services. It also provides completion, life-of-well maintenance, and plugging and abandonment of a well.
In addition, the company markets approximately 466 land drilling rigs for oil and gas land-based drilling operations in the United States, Canada and approximately 20 other countries worldwide; approximately 445 rigs for land well-servicing and workover services in the United States; 98 rigs for land well-servicing and workover services in Canada; 42 rigs for offshore drilling operations in the United States and internationally; and seven jackup units and components of trucks and fluid hauling vehicles.
Nabors trades at 5.3 times EV/EBITDA, with gross margins set at 14% and EBIT margin at 3%. Nabors investors are paid a 2.73% dividend. The consensus price objective is $10.20. Shares closed Tuesday at $8.79.
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While there is no guarantee that any of these companies get purchased, they all stand out on their own merits. While only suitable for aggressive growth accounts, they make good sense as takeover candidates or standalone entities.
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