What happened
Shares of U.S. onshore exploration and production (E&P) company QEP Resources (QEP) rose a dramatic 16% or so in the first hour of trading on Wednesday. There was no particular news out of the oil and natural gas company that would justify such an advance. And while crude oil prices were trending higher again after Tuesday's slide, QEP's swift price gain went further and happened faster than the moves of the energy industry peers which it normally trades similarly to. As of 12:17 p.m., the stock was up by about 16.5%. It's likely a rumor about the company that has investors excited here.
So what
According to industry watchers, QEP has been contacted by other companies about a possible takeover. Merger and acquisition news often puts investors into a buying mood, and in this case, it's not all that outlandish a proposition.
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For starters, QEP is a fairly small E&P name, with a market cap of less than $500 million. That's modest enough that it could be easily digested by a large number of companies. In addition, QEP has a material debt load that it has been struggling to carry during the fossil fuel sector's current deep downturn. The company had a financial debt-to-equity ratio of roughly 7 at the end of the third quarter, and being bought out by a financially stronger peer would be a quick way for management to get out from under the issue.
Moreover, scale is an increasingly important factor in the onshore U.S. market. QEP's more than 380 million barrels of reserves in Texas and North Dakota could be attractive to companies looking to expand their reach in either of those key oil-producing regions.
Now what
It's rarely a good strategy to buy stocks based on acquisition rumors, even if the buyout being bandied about seems logical. Though mergers and acquisitions are definitely happening in the energy sector, it's impossible to predict which companies will end up getting bought out or at what price. Most investors looking at the energy patch would be better served to stick with the biggest and best-positioned names, such as global giant Chevron. (Notably, Chevron recently agreed to buy Noble Energy, if you really have a desire to try to profit from M&A activity.)
