Get Texas Oil Rich… One Takeover Stock at a Time

A wave of consolidation is coming in the energy sector.

And there is plenty of money to be made as this trend heats up.

The way to get a piece of these profits is by owning shares of the companies that get taken over at significant premiums.

Today, I’m going to show you why I believe that a takeover wave in the energy patch is coming. And then I’ll tell you exactly which dirt cheap company you should own to profit from it.

The “Supermajors” Have Been Dealt a Strong Hand

Some opportunities are so good that you just have to act on them.

Today, the Supermajor oil and gas producers are staring directly at a few such opportunities.

The chart below plots the share prices of the 5 Supermajors — Chevron, BP, Total SA, Royal Dutch Shell, and ExxonMobil — dating back to 2014.

Included in the chart is the Oil and Gas Exploration Index (XOP), the index that tracks the entire industry, and Anadarko Petroleum, a large independent operator.

Stock Prices Chart

The chart clearly shows that the Supermajors have widely outperformed both Anadarko and the Oil and Gas Exploration Index.

But why have I singled out Anadarko?

It’s because the company’s lackluster stock performance and cheap valuation made it a prime takeover target. And this eventually helped the company get acquired at a huge premium by Occidental Petroleum after a bidding war with Chevron!

What I want to highlight is not just that Anadarko’s inexpensive valuation attracted two suitors, but also the type of bids that both companies made.

Chevron’s original $33 billion offer to Anadarko shareholders was to be funded with 75% stock and only 25% cash. Occidental’s offer was 50% stock and 50% cash.

The reason for the large amount of stock involved in both of these offers goes back to the chart above…

The Supermajors now trade at huge valuation premiums to most independent exploration and production stocks. Therefore, using their stock to purchase massively undervalued operators (like Anadarko with its wonderful Permian shale acreage) makes a huge amount of financial sense.

Rebuked of its attempt to acquire Anadarko, you can bet Chevron is looking at other acquisition options where it can exploit the valuation advantage it has over the smaller operators.

In fact, all the Supermajor oil and gas companies have the same opportunity to use their expensive shares to pick off inexpensively valued independents.

That is why I believe the takeover of Anadarko was just the start of an energy sector acquisition wave.

Parsley Energy Looks Extremely Cheap Using the Anadarko Takeover Price

Parsley Energy (PE) controls 227,000 highly coveted acres in the Midland portion of the Permian Basin.

This is exactly the kind of acreage that Chevron was targeting when it made its offer for Anadarko. And it’s exactly the type of acreage that Occidental stole right out from under them.

Parsley has been drilling some of the best wells in the region and has almost 8,000 future drilling locations planned. This is more than enough to move the needle for a Supermajor.

Even better, Parsley shares are dirt cheap. I mean really, really cheap.

One respected analyst valuing Parsley’s oil and gas assets, using the same valuation metric that Occidental paid for Anadarko, put a $95 price point on Parsley.[1]

That is a huge premium to the $18 per share that the company trades at today.

That means that Chevron, Exxon or any one of the other large producers could offer a huge premium to Parsley’s current trading price and still get a bargain.

And with the Supermajors’ shares trading at huge premiums themselves, I wouldn’t doubt that one soon takes over Parsley in a lucrative stock transaction.

That’s all for me today. Stick with The Daily Edge as we continue following the action in the Permian Basin. And when any stock is good enough for your portfolio, as always we’ll let you know.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@StPaulResearch.com

1 Goehring & Rozencwajg Natural Resource Market Commentary Q1 2019: The Bell Has Been Rung, SeekingAlpha

You May Also Be Interested In:

Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

His background...

View More By Jody Chudley