Last year was a relatively quiet one for mergers and acquisitions (M&A) in the energy sector. While the industry did get off to a red-hot start with several multibillion-dollar deals announced through June, there weren't any other notable transactions the rest of the year. That's likely because oil price volatility picked up big time, with crude tumbling into the low $40s over the summer before rocketing into the $60s by year-end.
Given that crude is still in the $60s, it could increase the appetite for M&A this year, with the following three oil stocks looking like interesting takeover targets.
A change at the top could open the door for a sale
Of last year's five biggest oil and gas acquisitions, three were in the red-hot Permian Basin, led by ExxonMobil's (NYSE:XOM) up to $6.6 billion purchase of companies owned by the Bass family. That continued the trend from 2016 when the industry spent billions of dollars gobbling up land in the region. One of the most prolific buyers was Parsley Energy (NYSE:PE), which spent $2.8 billion to purchase Double Eagle Energy last February after spending more than $1 billion buying up land in 2016.
The hunter, however, might become the hunted in 2018. Driving that view is the announcement that founder Bryan Sheffield plans to step down from his role as CEO at the end of the year. Parsley has already announced that its current COO will take the reins and lead the company in its next phase of growth. That said, this change could prompt a suitor to see if the company might be interested in a sale. It would certainly be an attractive candidate since it has a top-notch acreage position in some of the best spots of the Permian and its stock no longer trades at quite as pricey a premium as it once did since shares are down 20% over the past year even though oil rebounded. While several companies will likely be on the prowl for more land in the Permian this year, one potential suitor to keep an eye on is Diamondback Energy (NASDAQ:FANG) after it recently told analysts that it's more interested in merging with a producing rival than buying more undeveloped land.
Repositioned and ready to cash out?
Sticking with the Permian theme, Halcon Resources (NYSE:HK) is another potential buyout candidate. While the company sank into bankruptcy during the oil market downturn, it has since reemerged and shifted its focus to the Permian after selling off its assets in the Eagle Ford and Bakken regions over the past year.
The repositioned Halcon is on pace to deliver fast-paced growth in the coming years. However, the company's owners might not want to stick around much longer. That's because one of the ways the company eliminated much of its debt during the bankruptcy proceedings was by getting creditors to convert it into equity. As a result, they hold a large chunk of the company's stock and would likely want to cash out as soon as practical. That hasn't been possible to this point because shares of Halcon have slipped since its reemergence from bankruptcy. However, with the company recently selling the rest of its legacy land in favor of the Permian, it's much more attractive to a potential suitor like Diamondback. If a buyer sees a compelling strategic fit, it might offer enough of a premium to get Halcon's investors to take the deal.
The ideal exit strategy
Looking outside the Permian, Hess (NYSE:HES) stands out as a potential takeover target. That's because the company has been under pressure from an activist investor to put an end to its "continuing underperformance." In fact, the activist has even suggested the company remove CEO John Hess. That battle has already resulted in several changes, including the sale of a slew of assets and a 13% reduction in its workforce.
These moves have streamlined the company and sharpened the focus on its best assets, including a prime position in the Bakken Shale as well as a stake in a major offshore oil development in Guyana led by ExxonMobil. That makes Hess more attractive to would-be buyers, as does the fact its stock is down 8% over the past year even as oil has improved. Forcing a sale would be an ideal exit strategy for the activists.
Don't buy with a buyout in mind
After a quiet year, M&A activity in the oil patch should heat up in 2018 now that oil prices are higher because companies have more cash to spend. That said, mergers are notoriously tough to predict, which is why investors shouldn't bet on a stock just because it seems like a logical takeover target. Instead, it's best to stick with companies that can create value for investors on a stand-alone basis. Of this trio, the activist-led changes make Hess look like the most compelling option to consider right now.