Mergers and acquisitions specialists at Deloitte believe that the oil and gas M&A market is showing signs of life 2014. The industry could very well be in for a few months of heightened M&A activity.

Which companies look like attractive takeover targets? Well, based on the value of their reserves, Talisman Energy (NYSE:TLM) and Penn Virginia (NYSE:PVA) look to be great plays on the industry's developing M&A trend.

Putting together a valuation
The best way to value oil and gas producers is by the value of their assets. To place a takeover value on oil companies we need to take into account the value of their reserves, as this is usually where the majority of the value is hidden. The value of oil reserves is not usually represented wholly on balance sheets.

There are two main ways in which oil and gas plays can be valued according to the value of their assets. The first is the PV-10 value, or the estimated present value of the company's proven oil reserves, net of estimated direct expenses discounted at 10% per annum. This value gives us a ballpark figure for the value of the company's reserves.

The second method used to value oil and gas plays is the enterprise value-to-reserves ratio, which gives a value on each barrel of the company's reserves. While this figure can be useful, it can become complicated when trying to compare companies as reserves are often a mix of oil and gas. Some companies have more gas reserves, which demand a lower premium, so valuations can become skewed.

Talisman's engineers have estimated that the company's proved resources have a PV-10 value of $9.5 billion, while proved and probable resources are estimated to be worth $13.2 billion.

Now, Talisman's enterprise value currently stands at $14.8 billion, just above the PV-10 value of the company's proved plus probable resources. According to analysts at Berstein, however, this enterprise value should be closer to $18.9 billion, or $27.2 billion in a best-case scenario based on the value to be found within Talisman's assets. For any potential acquirer, this is where the value can be found.

Drilling to add value
The other company that looks attractive as an acquisition is Penn Virginia. Penn Virginia owns acreage within the Eagle Ford and is targeting net ownership of at least 100,000 acres within the region; at present, the company has just under 86,000 net acres. Obviously, the company would be attractive for any peer looking to increase its presence within the Eagle Ford region and draw synergies from a combination of the two firms.

What's more, the value contained within Penn's portfolio is staggeringly obvious. While figures like the PV-10 value can help, the company's own management has stated how much value there is to be found within Penn's acreage.

Specifically, Penn's management stated on the first quarter earnings conference call that, "If you buy an Eagle Ford acre for about $3,500, drill it with a $9.6 million well that acre net of investment is now worth anywhere from $80,000 per acre to $100,000 per acre depending on spacing."

So, let's add in the fact that Penn currently owns 86,000 net acres. That's a potential valuation of $6.9 billion if each acre is sold for $80,000, or $8.6 billion if each acre is sold for $100,000. Presently, Penn's enterprise value stands at $2.2 billion, indicating that the company could be worth double its current value.

So, Penn really does appear to be an attractive acquisition target.

Foolish summary
Some market analysts believe that the oil and gas industry is about to see a wave of M&A activity. Two really attractive targets are Penn Virginia and Talisman Energy, both of which appear to be seriously undervalued when compared to the value of their assets.

Penn is trading at a 50% discount to the value of its Eagle Ford acreage, while Talisman's enterprise value currently stands 55% below the "best case" value of its assets. These are two risk reward ratios that look extremely attractive.

Rupert Hargreaves owns shares of Talisman Energy (USA). The Motley Fool has no position in any of the stocks mentioned. 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.