Citi Dishes 6 E&P M&A Candidates

• Shares of US E&P companies have been under significant pressure over the past 5 trading days.
• Citi’s Robert S Morris stated that the Integrateds and NOCs could be considering US independent E&Ps as a cheaper source of reserve adds during the down-cycle.

The Integrateds and/or National Oil Companies [NOCs] may be considering “their prospects for replacing and/or adding reserves via the drill bit versus the cost of acquiring them,” analyst Robert Morris mentioned. At the current share price levels, the independents with “deep and quality inventories” may seem to be attractive alternatives.

Morris noted, however, that “we are not advocating a sharp uptick in M&A activity as an investment theme for the E&P sector.” A single or a couple of transactions have typically not boosted the entire E&P sector for more than a week or two.

The E&P sector has never witnessed a massive wave of M&A, and this is unlikely to happen now, the analyst said, while adding that once an E&P company has been acquired by an integrated or larger E&P company, the probability of the acquirer undertaking another acquisition in the near term diminishes.

Morris believes that the potential consolidators should have the following key criteria:

1. A strong balance sheet or low net debt to total capitalization
2. Below average or subpar projected CF/DAS and/or P/DAS

Based on this criteria, the most likely consolidators in Citi’s E&P coverage group are Hess Corp. HES [Rated: Neutral, PT $54], Marathon Oil Corporation MRO [Rated: Neutral, PT $14], and Occidental Petroleum Corporation OXY [Rated: Neutral, PT $76].

The potential acquisition candidates should have the following:

1. Deep and quality drilling inventories
2. Below average projected CF/DAS and/or P/DAS due to financial or other constraints
3. Attractive valuation on a total resources basis

Based on this, the most likely potential acquisition candidates are Eclipse Resources Corp ECR [Rated: Neutral, PT $2], Energen Corporation EGN [Rated: Neutral, PT $33] and Newfield Exploration Co. NFX [Rated: Neutral, PT $36].