The fragmented U.S. exploration-and-production industry has fallen from favor in the investment community, thanks largely to low returns and weak levels of free cash flow.
This has prompted speculation about consolidation, and Morgan Stanley energy analysts Wednesday offered some possible combinations that would make sense based on “accretion and geographic overlap.”
For industry leader Exxon Mobil (ticker: XOM), two potential acquisition targets are Pioneer Natural Resources (PXD) and Diamondback Energy (FANG). Pioneer has been mentioned as a possible target for Exxon for some time.
Morgan Stanley said Chevron (CVX) could buy Cimarex Energy (XEC), which is a much smaller target than Anadarko Petroleum. Chevron bid for Anadarko earlier this year and was topped by Occidental Petroleum (OXY).
“Consolidation appears increasingly necessary as shale matures,” the Morgan Stanley team wrote. “Many companies are still struggling to generate meaningful free cash flow and strong corporate returns, due in part to sub-scale operations and resulting high costs and inefficiencies.”
One of the challenges for deal activity is that mergers at large premiums have not been well received, which can act as a deterrent to buyers. That might prompt “low- or no-premium mergers of equals,” the report states. The authors include analysts Devin McDermott and Drew Venker.
Occidental’s deal for Anadarko came at a large premium and has played poorly on Wall Street, with Occidental down 26% to $45.
Other potential combinations include Marathon Oil (MRO) and Devon Energy (DVN), which have exposure to the hot Permian basin, and Range Resources (RRC) and Southwestern Energy (SWN), two natural-gas producers. The firm also cited Oasis Petroleum (OAS) and Whiting Petroleum (WLL), two producers in the Bakken region. The analysts cautioned that they have “no knowledge of any discussions involving any of the companies mentioned” in the report.
E&P stocks are having a tough year despite a 15% gain in crude oil prices to around $56 a barrel (based on U.S. benchmark West Texas Intermediate). The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund (XOP) is off 12% so far in 2019 to $23. Natural-gas producers like Southwestern and Range have been particularly weak.
Write to Andrew Bary at andrew.bary@barrons.com
https://www.barrons.com/articles/what-exxon-mobil-and-chevron-could-buy-next-according-to-morgan-stanley-51569508641
2019-09-26 14:37:00Z
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