You knew it was coming, with energy underperforming, companies filing chapter 11, and the sector in the worst shape it has been in for almost 20 years, consolidation was inevitable. While there have been some smaller deals in the energy sector, the ConocoPhillips (NYSE: COP) massive purchase of Concho Resources Inc. (NYSE: CXO) in an all-stock transaction has many on Wall Street wondering who will be next.

The transaction is valued at $9.7 billion of equity value and an enterprise value of $13 billion. All Concho shareholders will receive 1.46 Conoco shares, representing a 15% premium to the closing price of the stock on October 13, 2020. On a pro forma basis, the ownership of the combined entity will be approximately 79% ConocoPhillips and 21% Concho Resources owners.

The analysts at Goldman Sachs noted that the companies are expecting to realize nearly $500 million of annual cost and capital savings by 2022. Conoco also identified unquantified value opportunities, including margin improvement from improved marketing/commercial performance with the larger Permian position, development strategy optimization from leveraging Concho’s expertise in the Permian basin, and supply chain benefits from increased scale/scope in the lower 48.

Goldman Sachs feels there could indeed be additional deals, noting this in the research report from which we gleaned the ConocoPhillips deal specifics:

While we continue to see greater consolidation over time among the highly-fragmented US shale sector, we note that some of the transactions within the past year (including the recently closed Chevron/Noble Energy deal and recently announced merger of equals between Devon and WPX have implied no-to-modest premiums to prior day close. As such, we believe investor focus on M&A opportunities may be weighted against the outlook for longer-term oil prices. Broadly, we believe free-cash-flow, synergies and valuation considerations will be important drivers of future M&A considerations.

The analysts have six companies that screen favorably with strong Permian Basin share assets and have a merger and acquisition rating of 1. One of those stocks was acquired in a $4.5 billion deal late Tuesday. We focused on the two that are rated Buy, and both are on the Conviction List at Goldman Sachs. it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

EOG Resources

This leading company remains a top pick across Wall Street and is a recent Conviction List member. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China. The company’s principal producing areas in the United States are located in New Mexico, North Dakota, Texas, Utah and Wyoming.

Goldman Sachs is very positive on energy for 2021 and noted this in its report:

Goldman Sachs Exploration & Production analyst Brian Singer sees 52% upside EOG over the next 12 months with EPS estimates significantly above consensus for the current quarter and over the next 4 quarters. He believes shares are oversold and do not reflect the company’s sustainability LEADership in Leverage, Earnings, Assets and Decarbonization. EOG shares have sold off on risk around post-election federal land access where EOG has greater interest than other Permian peers.

EOG shareholders receive a rich 4.13% dividend. The price target for the shares at Goldman Sachs is $57, though the Wall Street consensus target is higher at $63.32. EOG Resources stock closed trading on Tuesday at $36.28 a share.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play and it is also a U.S. Conviction List member. 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 in 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 updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, a new $900 million credit facility further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.

Pioneer said late Tuesday that it has agreed to buy Permian Basin peer Parsley Energy Inc. (NYSE: PE) for $4.5 billion in stock. The transaction represents a 7.9% deal premium for Parsley holders based on closing prices from a day earlier, just before talks between the companies were first reported. The deal will lead to $325 million of cost cuts and add to earnings in its first year, the Irving, Texas-based company said.

Don’t think for a minute that Pioneer doesn’t stay in play, as an integrated giant like Exxon Mobil has the deep pockets to go after an asset like Pioneer.

Investors receive a 2.63% dividend. The Goldman Sachs price target is $127, while the consensus figure is at $131.28. Pioneer Natural Resources stock closed on Tuesday at $83.53 per share.

In a recent research report on the sector, Goldman Sachs raised its long-term oil price forecasts for 2021 and noted that fundamentals for next year appear skewed to a faster pace than the firm originally had in its base case for energy pricing. The report cited the rising likelihood of a COVID-19 vaccine, which would greatly help the travel industry, among others.

Goldman Sachs also pointed to discipline by both the OPEC countries and the shale producers in the United States, in addition to the majors’ upstream capital spending still low and shifting toward renewables. The firm set a West Texas Intermediate target of $51.38 a barrel and a Brent crude target of $55.63 for next year. Both over 20% higher than current levels.

We are staying with the two companies that are rated Buy because chances are very good that neither is acquired. So sticking with two that are on the firm’s Conviction List and are among the highest-rated energy stocks at Goldman Sachs make sense for investors looking to increase weighting in a sector that has taken a beating over the last year.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.