Energy Prospectus

7 Big Oil Targets That May Go Next After Chevron-Anadarko
BY MATTHEW JOHNSTON Updated Apr 22, 2019

Chevron’s recent $33 billion takeover of Anardarko Petroleum could unleash a major wave of M&A activity in the oil industry, according to some industry experts and analysts. Other independent oil exploration and production (E&P) companies saw their shares jump on the news as investors speculate on the next potential targets. “I do think this will start a land rush of deals,” John Kilduff of Again Capital told CNBC.

“Different from last year, this transaction could also ‘kick-start’ investor interest in E&P’s with current valuations looking attractive, [free cash flow] generation that is growing, oil prices that are well above most budgets while service costs remain benign, and now possible interest by the Majors making the prospect for larger premiums and a cash component,” RBC analyst Scott Hanold wrote in a note.


7 Potential Takeover Targets

(Company name: market cap)
Diamondback Energy: $13.29 billion;
Concho Resources: $22.94 billion;
Noble Energy: $13.03 billion;
Pioneer Natural Resources: $29.58 billion;
Parsley Energy: $5.81 billion;
Apache: $13.96 billion;
Hess: $19.22 billion.
Source: Barron’s, CNBC.

What it Means for Investors
Some of the primary targets are drillers located on oil-rich land and offshore holdings. Names like Diamondback Energy Inc. (FANG), Concho Resources Inc. (CXO), and Noble Energy Inc. (NBL), with their valuable land holdings in the Permian Basin, not to mention smart capital management, could see their shares rise as investors anticipate a future takeover, according to Barron’s.

Hanold names Pioneer Natural Resources Company (PXD) along with Noble and Concho as his top three candidates for a takeover. Pioneer has one of the largest positions in the Permian, as well as core acreage in Midland and the Delaware basins, and is capable of delivering organic growth of 10% and free cash flow over the next ten years and beyond.

In addition to Pioneer, oil equity analyst Paul Sankey at Mizuho Securities thinks Parsley Energy Inc. (PE) is another obvious buyout target. He also named Noble Energy as offering “deep value” for its assets in the Permian, Equatorial Guinea and Mediterranean. He told CNBC that he believes future consolidation will be motivated by attempts to more efficiently develop acreage in the Permian Basin.

While much of the focus has been on major shale players in the Permian, names like Apache Corp. (APA) and Hess Corp. (HES), which have large positions in North Dakota’s Bakken basin, are also attracting attention. Both companies’ shares moved higher after the Chevron–Anadarko deal was announced last Friday.

Looking Ahead
As service costs remain ‘benign’, according to Hanold, higher oil prices in the near term will add to the optimism pushing up potential takeover targets. As of Tuesday, oil prices have risen for six consecutive weeks, a bullish sign for both crude and stocks, according to analysis done by CNBC. Such six-week rallies have only happened five times since 2010 and on average, oil prices have been 2.61% higher and the S&P 500 has been 1.25% just one month later.

The Energy Report 04/22/19
By Phil Flynn (Apr 22, 2019 01:34PM ET)

Zero hour is approaching for the global oil market. Petroleum prices spiked on a report that the Trump administrations will not grant waiver extensions, in an attempt to drive Iranian oil exports to zero. The Washington Post reported that the State Department is set to announce that all countries will have to completely end their imports of Iranian oil or be subject to U.S. sanctions. The Post says that Secretary of State Mike Pompeo will announce to the media today that, as of May 2nd, the State Department will no longer grant waivers to any country that is currently importing Iranian crude or condensate. Yet, can the market trust that this is going to happen?

It was just last November when global oil markets were rattled after the Trump administration reversed course from their maximum pressure on Iran campaign and granted 180-day waivers to eight countries giving them more time to find alternative sources of oil. The waivers caught OPEC and U.S. energy producers by surprise and cost them a lot of money, as they had raised production to offset the losses of Iranian crude. Now one might wonder if the Trump administration will waver on waivers because it has become clear that driving Iranian exports to zero will increase already rising gas and diesel prices.

President Trump wavered last time because he knows how rising gasoline prices impact the voter’s moods. According to reports, the President was on the phone with Saudi Arabia supposedly trying to get them to raise output to offset the loss of Iranian oil, a loss that will take even more oil off the market in a world where supplies are already tight. OPEC and Russia have removed about 1.7 million barrels of oil a day and Venezuela production, according to some reports, may be getting close to only 600,000 barrels per day. The Post says that estimates put the approximate amount of Iranian oil exports in March at about 1 million barrels per day, down from about 2.5 million barrels per day in April 2018, the month before Trump announced that the United States was withdrawing from the Iran nuclear deal.

So, President Trump is fighting a supply war on many fronts, Iran, Venezuela, Libya and unless OPEC steps up and raises production, the world is going to end up with a shortfall of supply. Now some in the Trump administration argue that there is plenty of supply, but we are not sure how they are doing that math.

The Post says that “Officials also pointed to recent comments by U.S. special representative for Iran Brian Hook, who said earlier this month that waivers were appropriate last year due to concerns over oil prices that was publicly expressed by Trump.“ This year, he said, is different. “Because [in] 2019 we forecast more supply than demand, there are better market conditions for us to accelerate our path to zero,” said Hook. “We are not looking to grant any waivers or exceptions to our sanctions regime. Three of the eight countries that received U.S. waivers last November have already reduced their Iranian oil imports to zero: Greece, Italy and Taiwan. The other countries that will now have to cut off Iranian oil imports or be subject to U.S. sanctions are China, India, Turkey, Japan and South Korea.”

Maybe Trump will tweet because gas prices are going to rise. California prices hit over $4.00 a gallon, the highest in 5 years as refinery maintenance and unplanned outages, as well as shortages of ethanol, conspired to increase prices. Trilby Lundberg says that the average U.S. price of regular-grade gasoline jumped 13 cents a gallon in the last two weeks, to a national average $2.91 a gallon. The highest average price in the nation is $4.04 a gallon in the San Francisco Bay Area. The lowest average is $2.45 in Baton Rouge, Louisiana. The average price of diesel rose 4 cents over the past two weeks, to $3.14.

As we have been saying, the risks (for oil prices) are to the upside. Hedgers hopefully are hedged. If OPEC does not rise to the occasion, then oil prices are headed back into the seventies. U.S. retail gas prices will exceed three dollars a gallon. OPEC may want to take their time responding until their June meeting because they are still upset that President Trump granted Iranian waivers last November. And then there is that demand thing. Remember all the talk of recession and plunging global oil demand? Well, it has not happened. Extreme pessimism caused in part by oil’s sharp year-end selloff is now showing signs of a major oil demand rebound. That is being reflected in oil prices making new highs for the year and now testing upper resistance.

Libya

The Wall Street Journal is reporting that “President Trump’s outreach to a rogue Libyan general could push oil prices higher, the head of the country’s United Nations-backed government said Sunday. Mr. Trump spoke last week with militia leader Khalifa Haftar, who launched an offensive earlier this month to seize the Libyan capital of Tripoli, signaling a potential reverse of longstanding U.S. support for the U.N. recognized government. The two men discussed a “shared vision” for the country in a phone conversation, the White House said Friday. Messrs. Trump and Haftar talked about “ongoing counterterrorism efforts and the need to achieve peace and stability in Libya,” the White House said. Mr. Trump recognized Mr. Haftar’s efforts in “fighting terrorism and securing Libya’s oil resources, and the two discussed a shared vision for Libya’s transition to a stable, democratic political system,” the White House said. Fayez al-Sarraj, prime minister of the U.N.-backed Government of National Accord, said he had no confirmation from the Trump administration that it has changed course, but added that the continuation of the conflict would boost oil prices.“ Oil prices…usually rise if wars or unrest occur in oil-exporting countries,” he said in an emailed interview from Tripoli. He made the remarks as new fighting broke out in the southern districts of Tripoli this weekend. The death toll—comprised mostly of civilians—has now reached at least 227. Some 1,128 have been wounded and more than 30,000 people displaced, according to the U.N.”