Sustainable Investing

Kirk Spano

"World's Next Great Investing Columnist" --MarketWatch

Permian Focused Oil Stocks To Buy Now

With Chevron bowing out on the Anadarko battle with Occidental, that leaves quite a few companies in play again. Both Chevron and Exxon are likely to expand their footprint in U.S. shale in coming quarters. A spread of calls across the most attractive buyout and merger candidates could generate outsize returns as M&A activity takes place in the American oil patch.

Catalysts for rising and firming oil prices the next 12-18 months include: 

  • Iran sanctions enforcement.
  • Potential escalation of Middle East conflict (as I discussed President Trump validating Iran conflict thesis).
  • Venezuela and other oil production disruptions set to last at least a year.
  • Shale production growth is slowing for financial and technical reasons.
  • Lack of EV penetration until early to middle 2020s.

Read more about the oil market from Andrew Hecht this week:

Permian Oil Stocks To Buy Now

I recently covered 8 Permian Oil Merger & Acquisition Candidates.

The Permian Basin is the key oil shale field in America. It accounts for over 75% of American production growth overall (Gulf of Mexico most of the remaining) and virtually all of shale production growth. The Permian is where the best assets are. Other shale assets are merely add-ons to Permian assets.

The STACK/SCOOP in Oklahoma, Power River Basin, Eagle Ford and Bakken are purely secondary plays at this point. The Niobrara is a mixed bag with Colorado assets potentially becoming lost reserves.

Here are the Permian oil stocks to target for potential M&A activity: 

Devon Energy (DVN) is a domestic oil E&P.  Devon is in merger talks, we don’t know with whom. I mentioned in the webinar they would make sense as a match with Conocophillips (COP). That might not be who Devon is talking to as Conoco has been divesting. Given that Devon wants to focus on 4 core shale assets, there is really no shortage of merger candidates and several companies that might take them over.

Encana (ECA) has a similar profile to Devon in that it has valuable assets across several North American plays including valuable Permian acreage. The company recently merged with Newfield Exploration. While Encana seems poised to sell the rest of their non-core assets to become very cash flow rich now and in the future, they could be an outright takeover target by a Major or a potential merger candidate with a company like Devon. 

Likewise, Marathon Oil (MRO) has assets across U.S. shale plays, including the Permian, Bakken, STACK/SCOOP and Eagle Ford. Marathon could be a merger candidate with another midtier company to create a larger company with more scale and operations synergies. Marathon could also be a takeover play for the majors.

EOG Resources (EOG) could be a sensible merger candidate for all three companies. EOG is also a potential takeover target for the Majors, though I think they grow through mergers.

Concho Resources (CXO), Diamondback Energy (FANG) and Parsley Energy (PE) are Permian pure plays that have valuable assets in both the Delaware Basin and Midland region of the Permian. All three are potential targets of Chevron (CVX), Exxon (XOM), Royal Dutch Shell (RDS.b) and possibly BP (BP) which entered the Permian last year with a purchase of BHP assets.

Centennial Development (CDEV), run by industry legend Mark Papa, is a Delaware pure play. It is almost certain to be bought out due to its proximity to other operators, but also a need for scale. It will be a bolt on acquisition for another. It could even be acquired by Concho or Diamondback before they engage in another strategic transaction. Chevron could clearly gobble them up as well.

Pioneer Resources (PXD) is a Permian pure play now and would clearly be attractive as a takeover target by the Majors. A potential hang-up is that the CEO recently said the company is not a takeover target. Pioneers is also a merger candidate with Concho, Parsley or Diamondback. I could actually see Pioneer acquire Parsley. In such a transaction, they company would keep the Midland assets and likely sell the Delaware assets. 

From WSJ

Apache Resources (APA), Hess (HES) and Noble Energy (NBL) stand out acquisition targets for the majors as they U.S. and international assets that can be incorporated into global development, as well as, spun off to raise cash for core operations. BP seems a near perfect fit for Apache as their operations match up very well in the U.S., U.K. and Egypt.

All ten of the companies highlighted are buys at today's prices. I rank order them as: 

  • Devon
  • Parsley
  • Encana
  • Centennial
  • Concho
  • Apache
  • Noble
  • Pioneer
  • Diamondback
  • Marathon
  • Hess

I also think you can buy calls a few months out, as well as, the January 2020 LEAPs on all of these companies. About 5-10% out of the money and for no more than a percent or two of your portfolio each.

Kirk Spano covers Sustainable Investing as one of the original contributing analysts at FATRADER. Named the "Next Great Investing Columnist" at MarketWatch, Kirk has been getting the jump on secular trends for over 20 years, and now sees investing in alternative energy, smart grid, EVs, agriculture, healthcare and water as the most likely place to make outsize profits in coming decades.
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