4 Legitimate Energy Takeover Targets For 2012

If 2011 is going to go down as the year of the risk-off trade, and it very likely will, then it's no surprise that high beta energy stocks and the relevant ETFs that hold them have struggled. Year-to-date, the Energy Select Sector SPDR XLE is slightly negative while the Market Vectors Coal ETF KOL has plunged more than 30%. The interesting thing about the declines in energy stocks, particularly the mid- and small-cap varietals, is that now depressed valuations could spur a fresh round of deal-making in the energy patch in 2012. It's kind of flying under the radar, but there was decent sized coal deal announced Monday. Plus, there has been talk of some oil majors possibly looking to make a bigger deal for a for a U.K. exploration firm. A recent report by PwC says M&A activity related to U.S. shale plays will remain robust next year and another report by BDO USA said oil and gas CFOs are confident about their access to capital heading into the new year, meaning we could see plenty of energy sector M&A next year. With that, let's look at some viable takeover targets across the energy sector. Cloud Peak Energy CLD: We previously mentioned Cloud Peak as a legitimate takeover target and the stock remains teetering on the brink of cheap since on our initial prognosis. Arguably, Cloud Peak is in better financial shape than some other names that are kicked around as coal takeover targets such as James River JRCC and Patriot Coal PCX. With a market cap of $1.1 billion, this is by definition a small cap stock, so it wouldn't take much for large-cap suitor to pluck Cloud Peak from the market. Trading below $20, a fair takeover premium could run up to the $23-$24 area. Energy XXI EXXI: Bermuda-based Energy XXI has reserves of almost 117 million barrels and best of all for a potential suitor, those reserves are onshore in Louisiana and Texas. Simple math makes Energy XXI, which has been frequently mentioned as takeover bait before, attractive for any big oil company. Assuming anywhere from $90-$100 per barrel oil, what the company has in the ground is exponentially higher than its current market cap. Cameron International CAM: Cameron rose to infamy as the producer of the failed blowout preventer on the Deepwater Horizon rig, but think about this: This company was fairly anonymous until then and that means its products were working a vast majority of the time. Now that Cameron has settled its Gulf of Mexico spill legal issues with BP BP, there are no black clouds to chase away potential suitors. General Electric GE has been mentioned a possible Cameron buyer and by the way, Cameron announced a $500 million buyback today and trades about 33% below the average price target of analysts that track the company. Heckmann HEK: We're not going out on a limb by putting Heckmann on this list because a recent Bloomberg piece outlined the reasons why Heckmann maybe a real target. Here's why Heckmann makes for good takeover bait: It provides fracking services and fracking is how shale oil and gas is extracted. So for less than $7 you get a play on the North American shale boom without the exploration and production risk. Energy M&A rumors we're tired of: Will someone please hurry up and buy Range Resources RRC so this rumor that has been around for several years can be put to bed? Will BP say there is no chance whatsoever it wants to sell itself? Coincidentally, Royal Dutch Shell RDS could end either rumor for good as that company has been mentioned as a potential suitor for both Range and BP.