These 3 Stocks Could Be Takeover Targets

Source: Anadarko Petroleum. 

Investors love to speculate on mergers because betting right can lead to a quick profit. And while mergers can be pretty tough to predict, there are some that just seem to make a lot of sense. Here are three takeover targets that fit the bill. 

Adam Galas: Thanks to the oil crash, Golar LNG Partners (GMLP +0.00%) and its general partner Golar LNG LTD (GLNG 2.65%) are down 53% and 23% year to date.  In my opinion that makes them excellent buyout targets because the combined enterprise value of the MLP and the general partner is down to just $6.2 billion.

What makes Golar LNG such an attractive takeover target is its business model. Golar LNG Partners owns six liquid natural gas floating storage and regasification (FSRU) vessels and four LNG tankers, all of which are under long-term fixed-charter contracts with major oil giants.  Golar LNG owns an additional 11 LNG tankers and two FSRU vessels.

In addition to its fleet of 23 LNG ships, the fact that Golar LNG is getting into the floating liquefaction or FLNG business makes it that much more appealing a potential acquisition. That's because LNG is a booming business; however, construction of land-based LNG liquefaction and export terminals is a long and expensive endeavor, taking on average 48 to 60 months or more at a cost of several billion dollars. Meanwhile, a floating LNG terminal can be built in as little as 30 to 33 months at a fraction of the cost because the regulatory hurdles are far less strenuous.

Golar LNG is currently converting three of its LNG tankers into FLNGs because these vessels are ridiculously profitable. For example, its Hili and Gandria FLNGs have already secured eight and 20 year contracts, respectively, that are expected to generate between them $520 million to $650 million in annual EBITDA. Compare that to the average LNG tanker, which generates around $45 million in annual EBITDA.  Management expects that all together, the three conversions now underway, which will be completed by the first half of 2019, will increase Golar LNG's consolidated annual EBITDA by as much as $950 million or 231%.

Matt DiLallo: Outside of the biggest of big oil companies, almost every single energy-related company in North America is seemingly a takeover target. And while some companies will need to merge with financially stronger rivals in order to survive long-term, others could join together to create energy powerhouses. To achieve that goal, they'll seek out targets that have the powerful combination of a strong balance sheet and a world-class position in a key shale basin. Of the small handful of companies that meet that criteria, the most compelling, in my opinion, is Concho Resources (CXO +0.00%).

A leading pure-play driller in the Permian Basin, Concho Resources has the two things that its larger peers covet the most: a pristine balance sheet with a debt-to-EBITDAX ratio of less than two times, and a huge resource base to drive growth. While the clean balance sheet is a nice feature, it's Concho's resource base that an acquirer would really covet, given that it currently controls roughly 700,000 acres in the Permian Basin, estimated to hold 3.7 billion barrels of oil equivalent resources. It is a position that, thanks to combination of efficiency gains from enhanced completion techniques along with drilling longer horizontal laterals, has enabled Concho to drill better wells at a lower cost, which is improving its returns.

Concho is an ideal target for a company like Anadarko Petroleum (APC +0.00%), which recently admitted to a failed unsolicited takeover attempt of Apache (APA 5.75%). Apache has a lot of similarities to Concho, with its main attraction being its prime position in the Permian Basin, where it controls 3 million acres, and a solid balance sheet. 

The bottom line here is that while Concho's financial strength and strong resources base means that it doesn't need to merge, if the right offer came along to create an energy giant, it might be tough to turn it down. 

Rich Smith: Defense stocks have had a good run these past five years, with the iShares Dow Jones US Aerospace & Defense ETF (ITA +1.27%) more than doubling in value over that time. Yet all is not well in the defense sector.

 

ITA data by YCharts

Last quarter, not one of the defense companies I track saw revenue growth greater than in the single digits. About half the companies I follow saw their revenues decline. Unless U.S. defense spending picks up soon, a lot of these companies could be tempted to look for acquisitions as an alternate route to revenue growth.

 

I expect AeroVironment (AVAV 5.23%) to be one of the first companies snapped up when that happens.

 

Like its peers in the industry, AeroVironment is struggling to keep its head above water. Sales were down more than 9% in the most recent quarter, and over the past 12 months, the company has failed to earn a profit. If things keep going this way, AV could post its first full-year loss in more than a decade of doing business.

 

And yet, in some ways, AeroVironment still makes an attractive acquisition prospect. AV leads its industry in contract wins for the production of small unmanned aerial vehicles. It's one of only a handful of companies to have a true high altitude, long-endurance UAV (Global Observer) in its inventory. And outside of defense, AV is a well-known player in fast-recharging of battery-powered electric vehicles.

 

While that last product category may seem a non sequitur in a defense contractor, it actually helps to guide us toward who might want to own AeroVironment. So let me go out on a limb here and say not only that I think AeroVironment is a potential buyout candidate -- but that Lockheed Martin (LMT 2.52%) is the first company I'd look to as a buyer. An AV partner already, outside of defense, Lockheed has also shown a demonstrated interest in green technologies.

 

In short, while many defense contractors might want to own part of AeroVironment, Lockheed Martin is the one that would know what to do with the rest of AeroVironment, once it owned it.