I posted on twitter earlier the detail of a June 27th options trade where a trader sold 30,000 January 2012 $21 puts and bought 30,000 January 2012 $25 calls. The $1M trade will be worth more than $40M on the open tomorrow. This same trade was followed up twice in the past week, each time for 5,000 contracts, and is a trend I have seen in the options market since April. Needless to say, a lot of smart money was betting on Petrohawk being acquired, but I doubt they expected it to come at such a lucrative premium.
At the time of the deal Petrohawk shares were trading 14X earnings, 4.3X sales, 2X book and 14.35 EV/EBITDA, some numbers to keep in mind as we explore other names later in the post.
I see this deal as a game-changer for the Natural Gas stocks, specifically the ones with shale exposure. The hefty premium in an all-cash deal will revalue the acreage across all the shales and the stocks should gain on expectations of future deals. North America is seen as the "Saudi-Arabia of Natural Gas", and there have been a few deals in the last year, but now I think the race is on and there will be plenty of acquisitions moving forward. Foreign Oil Companies have a lot of cash to spend and are looking to enter the US Shale market, and are willing to pay up. The only concern remains environmental, as well as recent questions raised in the Times about companies overstating the productivity of their wells and size of reserves.
Some of the top shale assets in the US include Marcellus Shale, Bakken Shale, Barnett and Woodford, Fayetteville, Eagle Ford Shale, Horn River, Green River Basin, and Haynesville.
A few of the stocks that will be "in-play" tomorrow because of this deal, and should remain strong for the future outlook in the industry are as follows:
Apache (APA), Devon Energy (DVN), Anadarko (APC), EOG Resoources (EOG), Chesapeake (CHK), and Southwestern Energy (SWN) should trade well tomorrow and enjoy the valuation expansion, but are all trading with $15B+ market caps, and I want to focus on the next potential large acquisition candidates, also excluding the small caps.
Newfield Exploration (NFX, $66.90: The $9B Oil & Gas producer trades 10.8X earnings, 4.57X sales 9.5 EV/EBITDA and 2.7X book. Newfield has over 100 potential locations in the Woodford Shale with 6 wells On-Line and 172,000 net acres. It also has 30-35 wells in the Eagle Ford Shale. Stifel raised shares to Buy on July 8th with an $80 target.
Range Resources (RRC, $55.10): The $8.85B Oil & Gas producer trades 35X earnings, 9.55X sales 22.4 EV.EBITDA and 4X book value. On those metrics, shares are pricey to peers, but it owns some valuable assets. Range has assets in the Marcellus Shale, Wolfcamp, Bone Springs, Woodford, and Utica shales. It is the lowest cost producer among the 33 gas companies. Production with a CAGR of 12% and Reserves at 32% in 2010. 86% of its capital budget is focused on the Marcellus Shale, seen by many as the best opportunity. Goldman started shares Neutral with a $63 target in June.
Cimarex Energy (XEC, $83.54) is a $7.15B Oil & Gas producer that trades 9.9X earnings, 4.5X sales, 6.88 EV/EBITDA and 2.65X book value. I have long considered Cimarez to be the best value among gas producers. Cimarex is 67% Natural Gas with 77% proved developed, and production of 590 MMcfe/d. The breakdown for production is 45% Mid Continent, 25% Gulf Coast and 30% Permian. It has assets in Western Oklahoma with the Cana-Woodford Shale and in the Permian Basin it has 125,000 acres at Wolfcamp, 160,000 at Avalon and 60,000 at Cisco/Canyon, all shale targets. Stifel raised to Buy on July 8th with a $105 target.
Ultra Petroleum (UPL, $44.86): Ultra Petro is a $6.86B Oil & Gas Producer trading 15.6X earnings, 7.12X sales, 5.65X book value and 10.12 EV/EBITDA. Ultra Petro grew production 19% in 2010 and is an emerging Marcellus Shale play. The Company targets 50% production growth from 2010 to 2013. Capital One SouthCoast raised shares to Add with a $58 target on June 3rd.
Cabot Oil & Gas (COG, $62.60): Cabot is a $6.55B Oil & Gas Co. that has been on a strong run in recent weeks, and trades 28.55X earnings, 7.8X sales, 3.5X book value and 15.22 EV/EBITDA. Cabot is at a record growth pace with 31% reserves growth and 27% production growth. Cabot has a lot of Oil assets, but its major gas asset is in the Marcellus Shale, and one of the best acreages out there. Howard Weil raised its target to $75 on June 28th, and Canaccord raised its target to $85 with a Buy rating in early June.
Plains Exploration (PXP, $37.29): Plains Exploration is a $5.26B Oil & Gas Co. trading 12.56X earnings, 3.3X sales, 1.5X book and 10X EV/EBITDA. Plains has assets in the Wind River Basin, California, Eagle Ford, and Haynesville. Goldman raised its target to $52 on June 10th with a Conviction List Buy. PXP plans to sell 20% of its deepwater Gulf of Mexico assets in Q3. Its drilling activity in the Eagle Ford Shale looks to be driving growth to the upper end of forecasts.
SM Energy Co (SM, $72.14): SM Energy is a $4.59B Oil & Gas Co trading 21.3X earnings, 4.4X sales, 3.8X book and 11.77 EV/EBITDA. Jefferies has a $73 target, while Canaccord set a Buy and $101 target in June. 66% of revenues are from Oil, while 65% of proved reserves are in Gas (640 Bcf). Its focus is in the Eagle Ford Shale, Bakken, and Granite Wash. It sees 20%+ production growth in 2011.
One smaller Oil&Gas name that is worth a look is $1.6B Swift Energy (SFY) with 119,000 Eagle Ford Shale Acres
A few smaller shale plays like PVA, CRZO, REXX, MHR, and GST could be some big percentage movers, as the speculative names tend to runs after deals like this.
The analysis would be better using industry specific ratios, looking at proven and unproven reserves, etc., but in the essence of time I kept it fairly simple. As far as options activity I have seen the most bullish in COG, SM and PXP of the above mentioned names.
I would last mention that Consol Energy (CNX) has been seeing a massive amount of bullish options activity in September and October, using call spreads and bullish risk rerversals, and is a name I have long seen as likely to sell its valuable Marcellus Shale assets.
A graphic that breaks down many of the Co's is:
No mention or thoughts on EP?
ReplyDeletevery informative article. Thanks
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