The Takeover Rumors Are Flying Around One Of My Top Energy Picks…
It looks as if one of my top picks in the oil & gas sector is in preliminary talks with a potential buyer.
The Wall Street Journal first broke the story on April 7, and it was picked up by Reuters, Forbes, and several other media outlets over the weekend. In case you missed it, investors awakened to a nice 8% pop in the stock at the opening bell the following Monday morning.
I’ll circle back to this shortly.
As we know, the oil and gas sector has long been a hotbed of M&A activity. While dealmaking cooled off somewhat during the pandemic, the hiatus appears to be ending. According to Bloomberg, North American energy companies have already announced $25 billion in mergers and acquisitions so far this year. And that could be just the beginning…
A Wave Of Deals Is Coming To The Energy Sector
Consulting firm McKinsey & Company just released a bullish forecast for $230 billion in domestic energy deals this year – nearly ten times what we’ve seen thus far.
Supply disruptions sparked by Russia’s invasion of Ukraine have kept crude at elevated levels, filling the coffers of upstream producers. Exxon Mobil (NYSE: XOM) more than doubled its earnings last year. ConocoPhillips (NYSE: COP) generated a whopping $28 billion in operating cash flow.
A decade ago, that incoming cash would be recklessly spent even faster than earned on new expansion projects. But the growth-at-any-cost mindset has given way to an industry-wide focus on capital returns. Spending is far more disciplined these days, while record sums have been plowed into dividends and stock buybacks.
Years of belt-tightening (combined with stronger well economics) have enabled producers to operate at much leaner breakeven levels. So when oil hits $75 per barrel, they are swimming in excess cash – and motivated to invest it in the pursuit of new drilling inventory.
What better place than the oil-soaked Permian Basin, where output is headed towards 7 million barrels a day? Despite years of consolidation, it’s still a relatively fragmented market out in West Texas, with dozens of small players staking their claim. But they are gradually being picked off one by one. The former head of Parsley Energy (which was absorbed by Pioneer in 2021) believes we are still in the middle innings of this cycle.
Takeovers are the quickest and easiest way to increase scale and replenish depleted reserves. And OPEC’s supply cuts have set a floor beneath oil prices for now, emboldening deals. Given record profits (and healthier balance sheets), targeted companies will likely demand above-average premiums.
The Perfect Target For An Oil Major
Now, this is where my top pick comes into play — Pioneer Natural Resources (NYSE: PXD).
I’m not at all surprised to see Pioneer in the crosshairs. It’s not just the prime contiguous acreage (which holds thousands of promising drilling targets). It’s also the firm’s efficient, low-cost, best-in-class assets. It boasts the highest returns per barrel among its peer group – which means fat profits even in commodity downcycles.
Case in point, Pioneer hauled in $8.4 billion in free cash flow last year and returned $8.0 billion of that to investors.
The stock has been among our top performers over at Takeover Trader, more than doubling from $92 to the current $207 per share. Along the way, we have also collected a hefty $33.92 per share in dividends, bumping the total return to 160%.
With a market cap now in excess of $50 billion, Pioneer has grown too large for most potential acquirers to swallow – except perhaps a supermajor like Exxon Mobil (NYSE: XOM).
Guess who’s been sniffing around? Yep, Exxon.
Exxon has made no secret of its Permian Basin ambitions. The company intends to plow $24 billion into growth projects this year, and shale has increasingly become a more important part of the mix – it just wrote off failed offshore projects in Brazil.
These two companies are literally neighbors. Both are headquartered in the same Dallas suburb of Las Colinas, and some of the execs are probably chummy.
Stung by overpaying for XTO Energy over a decade ago, Exxon has become more circumspect. But after years of nibbling, it may be ready to take a real bite. When you produce 3.8 million barrels daily and churn out $50+ billion in annual profits, moving the earnings needle isn’t easy. But Pioneer is more than capable. As the top leaseholder in the core Midland Basin, it’s a tempting pure-play target.
Action To Take
After a record-breaking year (and using its richly-valued shares as currency), Exxon certainly has the financial resources to close a deal of this magnitude.
Let’s be clear – these talks are in the early stages. It’s possible nothing materializes. But no options are off the table at this point. To quote one overheard phrase in the Permian, “everyone is talking to everyone” about potential tie-ups.
That means, if you missed the boat on PXD, there are still gains to be had — particularly if a deal happens.
But as much as I like PXD, there’s another opportunity in the West Texas oil fields I like even more…
You see, I’ve found a little-known Texas company that could uncork the “mother of all oil booms”…
We’re talking about nearly a billion barrels of oil… And in the coming days, it could unleash a surge of mega-profits for in-the-know investors. Click here for the full details now.