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What Will Chevron Buy?


This energy giant is apparently starting to look around for something to buy with its enormous pile of cash, and there are a handful of domestic gas plays that just may fit the bill.


Everyone always has an opinion about what someone else should do with all their money. And lately, investor speculation has abounded about what Chevron (CVX) intends to do with the nearly $21.5 billion cash hoard on its balance sheet.

With just under $9.8 billion in long-term debt, the supermajor could easily afford to go on an acquisition spree. Of course, many of the largest integrated oil companies boast substantial cash on their balance sheets, though with the exception of Exxon Mobil (XOM), none have so much cash that it dwarfs their long-term debt.

Given Chevron's robust portfolio of international assets, some industry watchers believe the energy giant might be interested in expanding its stake in domestic shale plays. Following Chevron's acquisition of Atlas Energy in February 2011, the integrated energy giant's holdings in the Marcellus and Utica Shale formations expanded to 700,000 acres and 600,000 acres, respectively.

But despite its roughly 3 million net acres across 13 unconventional plays, the company still lags peers such as Exxon Mobil and Chesapeake Energy (CHK) in establishing a truly major presence in North American shale.

As natural gas prices cratered, however, this relative shortcoming in Chevron's portfolio of assets proved to be fortuitous. And now that the valuations of those firms most leveraged to shale plays have fallen in sympathy with gas prices, analysts expect merger and acquisition activity in formations such as the Bakken Shale to pick up substantially.

While Chesapeake's major shareholders are lobbying the firm's management to put the company up for sale, analysts expect Chevron to avoid the thorny issues that could emerge in a deal with Chesapeake in favor of smaller, bolt-on acquisitions.

But there's always the possibility that Chevron could forge a deal to acquire some of Chesapeake's assets without having to swallow the company whole. However, as the "oiliest" of the major integrated energy companies, Chevron may opt for less gassy fare.

Other names that have been bandied about as possibilities include Hess (HES), Continental Resources (CLR), and Range Resources (RRC). The first two firms have major stakes in the Bakken, while the latter firm has sizable holdings in the Marcellus.

Along those same lines, SunTrust Robinson analyst Neal Dingmann recently issued a research note that says companies operating in the Bakken remain undervalued, and could be primary takeover targets for larger industry players.

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No positions in stocks mentioned.
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