Last month, Jim Cramer peered into his crystal ball and saw two American energy giants, EOG Resources (NYSE:EOG) and Pioneer Natural Resources (NYSE:PXD), as prime takeover candidates in 2014. Personally, I thought his crystal ball was a bit cloudy, as neither looks like an ideal takeover candidate. Sure, EOG Resources is one of the best oil stocks in America, but it's also worth more than $45 billion. Even if it was bought out, shareholders wouldn't get much of a premium.
The same could be said for Pioneer Natural Resources. At nearly $25 billion, there are few companies that could afford to buy it out at much of a premium. Not only that, but Pioneer would be doing its investors a disservice by selling out now, as it believes that it's sitting on billions of barrels of untapped oil reserves.
That's why I wonder if Cramer's crystal ball isn't busted. Especially after reading about an energy buyout candidate that could double investors' money in 2014.
A double just waiting to happen
According to analysts at SunTrust Robinson Humphrey, the top takeover target for 2014 is Penn Virginia Corporation (NASDAQOTH:PVAHQ). They believe the stock is worth at least $18 a share. That's double the price it was trading before the firm made its bold call.
The analysts noted that, based on comparable recent sales in the Eagle Ford Shale, which is Penn Virginia's top asset, the company is trading at roughly 25% of the value of its acreage. It bases that number on Devon Energy's (NYSE:DVN) recent acquisition in the Eagle Ford, where it picked up 82,000 net acres for $6 billion.
With the Eagle Ford being such a core driver of American oil production growth, there are a number of companies that would like to pick up a prime spot in the play. Penn Virginia was ahead of the game when it bulked up on its position in the Eagle Ford earlier this year when Magnum Hunter Resources (NASDAQOTH:MHRCQ) cashed out on its position in the play. While that was a solid deal for Magnum Hunter at the time as it produced a three-year internal rate of return more than 80%, the deal now looks like it will turn out to be a real steal for Penn Virginia.
Rapidly improving fundamentals
In addition to the upside from a potential buyout, Penn Virginia offers investors high-growth access to the Eagle Ford. The company currently has 72,000 net acres in the play, and has more than 890 future drilling locations. That should enable it to keep drilling for at least the next decade. However, it has set a realistic goal to grow its position to 100,000 net acres and more than 1,000 future drilling locations by pursuing small bolt-on deals to bolster its position. Overall, it sees the current implied value of its acreage position to be about $2.5 billion based on Devon Energy's recent purchase in the play.
These assets put the company in the position to fuel oil production growth of 65% to 85% in 2014. While Penn Virginia is currently funding its growth by selling assets and piling on debt, it has a plan in place to self-fund its drilling program within three years. Because of that, even if a buyout never develops, Penn Virginia's oil-focused growth in the Eagle Ford should fuel top returns for investors in the years ahead.
While both of Cramer's buyout candidates are great oil stocks, neither has the potential to deliver returns like Penn Virginia would if it was bought out in 2014. Further, neither of those top oil stocks have the untapped upside of Penn Virginia if a buyout doesn't occur. That's why investors looking to speculate on an energy buyout shouldn't follow Cramer's crystal ball in 2014.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.