Why Chevron Could Be Eyeing These 4 Companies After Losing Anadarko Bid

Energy

Published: May 8, 2019 7:15 am

Last Updated: January 30, 2020 9:04 pm

It’s all but a given now that Anadarko Petroleum Corp. (NYSE: APC) will accept the takeout offer from Occidental Petroleum Corp. (NYSE: OXY) and with good reason. The cash portion of the offer, like the bid from Occidental, was substantially higher than from Chevron Corp. (NYSE: CVX). In addition, Occidental has the backing of Warren Buffett, and at the $76 offer price, Anadarko is trading at a 15% premium to its peer group based on 2020 enterprise value to estimated EBITDA. In other words, it is more than fully valued, so most likely there will be no Chevron counteroffer.

While it’s rare that a major integrated with the firepower of a Chevron would end up on the losing end of a deal of this size, but it makes sense for it to walk away. The company did have an overlap with Anadarko assets in the Permian, and while it was more than capable of managing the company’s Mozambique liquefied natural gas (LNG) operations, there was no reason to bid higher because that would have required a far bigger cash offer than what was initially presented.

The question is where Chevron turns now in its quest to expand its operations. A new Stifel report makes the case that there are far cheaper alternatives that make sense for the company to pursue next. In addition, the mere fact that Chevron may continue to hunt for a strategic Permian or Denver-Julesburg Basin asset could put a bid under the entire group.

The Stifel team specifically mentioned four companies that could be in the sights of the Chevron management, and all four are rated Buy. While there is no guarantee whatsoever they are indeed the target, they all make sense for investors looking to add quality exploration and production companies to their portfolios.

Cimarex Energy

This remains a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.

The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.

Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.

Investors in Cimarex are paid a small 1.21% dividend. The Stifel price target for the stock is a solid $118, and the Wall Street consensus price target is much lower at $91.83. The stock closed on Tuesday at $66.02 per share.

Concho Resources

Last year, this company bought RSP Permian for $9.5 billion, and most on Wall Street loved the deal. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.

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It offers investors a unique combination of investment themes, including valuation, rate-of-change and resource expansion themes. The company is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the most impactful catalysts across the Delaware Basin, including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale.

Concho Resources has reported strong earnings but still has a lot of upside to the posted price targets.

Concho Resources investors are paid just a 0.47% dividend. Stifel has a price target set at a gigantic $254, while the posted consensus target was last seen at $155.58. The stock was trading at $106.20 a share when Tuesday’s trading came to a close.

Parsley Energy

This is a smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of its acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.

The company is a catalyst rich and is Permian Basin pure play, which could appeal to Chevron. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It also is rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.

The $39 price target at Stifel compares with a $27.70 consensus target price. The stock closed trading most recently at $19.55.

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Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian as it expects to deliver solid production growth in 2019 and beyond.

Investors are paid a tiny 0.38% dividend. The Stifel price target is a staggering $320. The consensus price figure is way below that level, at $201.99, and Pioneer shares were last seen trading at $147.97 apiece.

Again, there are no guarantees that Chevron, or anybody else, buys any of these companies now or in the future. However, for investors looking for quality energy stocks with Permian and Denver-Julesburg Basin exposure, these stocks are among the best individual ideas. And while oil has backed down in price recently, the busy summer driving season is right around the corner.

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