Readers have been asking about this Garrett Baldwin teaser for a couple weeks, and I’m finally getting to it today… he’s selling his Flashpoint Trader service from Money Map Press ($995/yr for the trading alerts, $1,995/yr for live trading sessions and other bonuses), which sounds like an active trading advisory with a heavy emphasis on options, and the bait he’s dangling is information about five prime buyout candidates who own valuable assets in the Permian Basin, the most productive oil region in the US.

Here’s how he introduces it on the order form:

“The moment the ink dries on the Exxon-Pioneer deal…

“It’s liftoff!

“Every oil major on the planet will be scrambling to stake their claim on the 41 billion barrels of oil in the Permian.

“The entire prize is worth $7.3 trillion…

“Meaning the biggest buyout boom in oil ever seen, could dwarf what happened in the Bakken.

“Today, you can claim your share before the wider world has even woken up to the opportunity that’s staring them in the face.”

That’s a reference to the reporting last month that $50 billion shale titan Pioneer Natural Resources (PXD) was in buyout talks with $420 billion global energy giant ExxonMobil (XOM), though I haven’t heard any updates on that since mid-April. And it’s very much a short-term promise of huge gains, which people always love (though that also makes the odds of success awfully small)…

“I’ve identified five companies that are prime candidates to be gobbled up in the frenzy – potentially making their investors a fortune.

“All five own hundreds of thousands of acres of prime sought-after land in the heart of the Permian basin…

“All five have just posted stellar financials in the first quarter of 2023…

“All five have a proven pedigree for extracting millions of barrels of oil every year from the Permian basin – with ready-made operations already set up…

“And most importantly…

“All Five Have the Potential to DOUBLE or TRIPLE Your Money in a Month or Less”

So what are the five companies he’s teasing in the special report, “How to Triple Your Money from the Permian Buyout Boom?” Let’s jump right into the details… we won’t dig too deep on each one, since we’ve got five to get through, but we can at least get you some answers and send you on your way to do your research.

And I won’t go into the option details, but the best profit would come from buying out-of-the-money call options on any of these that go out 3-6 months or so… and that would also, of course, bring the highest probability of losing 100%. Speculating on buyouts is tricky, and it’s made especially so if you’re trying to time them in a very tight window of a few months or a year — even if you pick the best buyout candidates, the odds of a deal coming together at the exact time that you bet are very low (which, of course, is why the returns are so high if you get lucky). I’d rather be the casino than the gambler in this situation, but gambling can certainly be fun.

So… what are those five? Let’s run through the clues from his pitch…

He sums it up again:

“I’ve identified five companies that could help you capitalize as this new wave of M&A hits in the Permian.

“Remember, the focus here is takeover targets – the smaller companies with massive upside.

“Companies that could make you a fortune, when the options on their stocks go through the roof.”

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And the first batch of clues:

“Let’s talk about company #1.

“This company has been on a $2 billion buying spree in the Permian – with 3 big acquisitions including a recent $627 million purchase…

“Its total land in the basin has shot up 5x since 2016 to 256,000 acres.

“It operates 850 drilling locations in the region, with $4.6 billion in oil reserves already proven…

“And it just posted record-breaking numbers to end 2022, with adjusted Earnings Before Interest and Taxes of $1.1 billion.

“Plus, a Free Cash Flow of over $500 million.

“This is a major takeover target for any number of big guns who want to ramp-up their presence in the Permian.

“We’re talking about an excellent company with proven drilling operations and stellar financials…

“And their stock is cheap. It’s trading at around $10 a share right now.

“I recommend you own this company outright.

“And should we see a buyout, you could be looking at a fast-windfall from the right options of 150% in a month or less.”

Thinkolator sez: That’s Earthstone Energy (ESTE), which did indeed buy some Permian Basin properties from Titus Oil & Gas last year. Quite small, with a market cap of $1.3 billion, trades at about 2X trailing earnings and about 3.5X expected 2023 earnings, so, like a lot of oil companies, it’s really cheap right now relative to its earnings and cash flow, and all the numbers look pretty fabulous.

I don’t know how you’d pick the “takeover” price for these little guys — they do have options trading, so you can certainly speculate, but there are a lot of small cap oil and gas names, and a lot of different priorities among larger operators (most of whom don’t seem that eager to spend money at the moment), and guessing which one might be the next takeover target is more like gambling than investing. Could happen, but better buy a stock you’d like to own if it doesn’t happen, so it’s good that he’s recommending buying this stock, too, not just speculating on a quick takeover bid with options.

ESTE posted a good earnings report a couple weeks ago, so they won’t be reporting again until early August — right now, analysts expect the earnings for 2023 to be about 25% below 2022, their last earnings presentation is here if you want to get a quick overview.

Moving on to number two…

“This firm has a major 40,000 acre presence on the Northwest Shelf of the basin – primarily in the prolific Wasson Field and Yeso Trend – which has produced 3 billion barrels of oil over the last century.

“The chief benefit of drilling on this shelf is reduced costs – in both drilling, fracking and completion.

“It’s been busy recently – making a transformative $330 million acquisition in the Permian’s New Mexico region, adding over 100 new drilling sites to its footprint.

“Its year-on-year production is up 80%…

“Earnings Before Interest and Taxes were up 81% on the year…

“And right now, the stock is hugely undervalued at roughly $46 a share.

“Based on my analysis all the ingredients are here for this company to be a major takeover target, sometime this year – likely before Q4…

“I recommend you load up on shares now.

“And if the takeover materializes, the gains of the right options could triple your money in a month or less.”

That one’s Riley Exploration Permian (REPX), which did indeed buy some Permian drilling locations from Pecos Oil & Gas across the border in New Mexico (which has a little slice of the Permian Basin, most of it is in West Texas) — they did spend $330 million on that deal, paying for it with a bond offering and some other borrowing (at 10.5%), and the deal just closed last month. The stock is way below $46 now, it’s at about $35 as I type, so you’re welcome for waiting a week or two to cover this particular teaser ad, now the stock is “on sale!”

Funny how nobody wants to buy stocks when they go on sale — when it comes to stocks, folks are driven a lot more by signals of popularity (like a rising share price) than they are by discounts to fundamental value. Imagine if Walmart worked that way? They’d have a crush of people at the door on Black Friday fighting for the chance to pay 20% higher prices.

REPX is expected to grow earnings sharply from here, from $5.99 last year to $8.43 this year and more than $14 in 2024, though there are only two analysts providing guesses so we shouldn’t get all that excited. That puts them at about 4X earnings, with roughly a 4% dividend yield.

Buying more production with debt should make the earnings per share grow, though it also makes them a bit more fragile if oil goes into a longer tumble (the leverage is not extreme, but the more you borrow, the less control you have in a downturn). They’re also doing some interesting tinkering around on the edges with stuff like on-site power generation (instead of flaring the excess natural gas they produce), and partnering with carbon capture projects (like Occidental has done, though on a much different scale). Their latest corporate presentation is here.

Next! Moving on to Company number three…

“This firm has significant presence in the oil-rich Midland region of the Permian Basin, where it’s chief focus is in the Spraberry and Wolfcamp formations.

“A recent $4.3 billion acquisition boosted its footprint in the region to 179,000 acres.

“Last year it added more than 450 quality drilling locations to its property portfolio in the Permian region, where its performance continues to trend in a steep upwards trajectory compared to its rivals.

“In Q4 it delivered an impressive $235 million to shareholders including dividends…

“Net earnings were an excellent $1.3 billion, with $535 million in free cash flow at the end of Q4, 2022.

“Given this company’s prime location in the Midland region – and strong financial performance last year, it should be a takeover candidate for any number of major players in the next couple of months.

“Its stock price is currently less than $40 a share.

“I’m projecting a profit target of 100-150% on the options in about a month for investors on the back of a buyout.”

That one is Ovintiv (OVV), which is quite a bit larger than the others, with a market cap of about $8 billion, but similarly valued on the cheap and yet falling pretty sharply this year, as worries about oil demand and tough comparisons from last year’s spike in oil prices seem to keep investors out of a lot of oil stocks.

Someone even posted a poem about their latest acquisition binge on LinkedIn last month, so I can’t resist sharing that with you (LinkedIn as the next location for your poetry slam? Whatever will they think of next)… can’t say that the flow of the poen is exactly compelling, but, well, it’s a poem about an oil company acquisition, we must be charitable (I ain’t a poet, and I sure do know it) …

If you think the name Ovintiv is dopey, well, you’re not alone — they used to be based in Canada and called Encana, if that helps, the name came a few years ago and was meant to call attention to their focus on (and corporate move to) the US.

Encana/Ovintiv is a good example of why long-term investors are often leery of oil companies, by the way, which is part of what has pushed investors to make oil company boards less growth-focused and more focused on per-share profitability. Here’s the total return chart of the stock since it took the name Encana a little over 20 years ago:

That’s OVV down in purple, in case it isn’t clear, compared to the S&P 500 in orange… and I also threw in Exxon Mobil (XOM), one of the few oil and gas companies to really hold its own with the S&P pretty consistently over the past couple decades… though there’s a price for that, as you can see, XOM lagged FAR behind Encana/Ovintiv in the oil bull years, until oil prices collapsed in 2014.

Ovintiv it has its roots in Canadian railroad properties, and back when Encana was built by combining a few different Alberta oil companies, the vision was that it would grow into a Canadian titan that could resist US overtures in the oil and gas lands of Western Canada… they even built a trophy skyscraper in Calgary during the boom years, and were the most valuable company in Canada for a brief spell (The Globe and Mail ran a “who killed Encana” story of the Canadian angst over the move to the US and the new name, in case you’re curious).

And those acquisitions? Poetry aside, they bought up a bunch of private equity-funded oil companies in the Permian last month. Will buyer become seller? Never say never, I guess, though it’s always easier to imagine a small company getting taken over than a large one, and there are still a lot of little oil companies in Texas, both public and private.

Still not done… next in line!

“Next, we have company #4.

“With a total of 533,260 royalty acres across the core of the region – and 4.4% revenue interest – including a highly concentrated footprint in the most desirable areas…

“This is one of the best operators in the region.

“It already has existing relationships with over 90% of the top Permian operators and blue-chip midstream companies including Phillips and KinderMorgan.

“And its free cash flow growth has shot-up by 40% since 2016.”

OK… more details?

“Adjusted earnings before interest and taxes in 2022, topped out at $592 million…

“Total revenue was $667 million…

“And it returned $335 million to shareholders…

“Best of all, it carries no debt, and has a cash positive balance of $511 million.

“Of all the companies we’ve discussed today, this could be one of the first to be bought out as the rush for land in the Permian takes flight…

“It’s coming off a record-breaking year and it has prime acreage all over the region…

“That’s why I’m forecasting a big gain on the options play, in light of any potential takeover, of 150% in a month or less.”

That one has been a favorite of value and royalty investors for a couple generations now, it’s Texas Pacific Land (TPL). They own mineral rights on hundreds of thousands of acres across the state that used to be railroad land, and while the stock ain’t exactly cheap right now, it’s certainly a lot less popular than it was last year — the stock has been cut in half from its November highs, so it’s around $1,300 now, which is roughly 24X earnings.

TPL has some added uncertainty, since there’s been a long-running dispute between the trustees/executives of the firm and some major shareholders, led by Horizon Kinetics (TPL used to be a trust, it converted to a corporation in 2021, partly as a result of this dispute). The latest dispute has been over the company’s plan to authorize a stock split and sneak in a shareholder vote that would allow for major dilution. That’s tied up in court now, and it’s hard to see the executives and board winning against the wishes of a majority of shareholders, but one never knows — if they can get approval to raise the allowable share count, that would reduce the voting power of their opponents (like Horizon Kinetics, a thorn in management’s side and by far the largest shareholder).

There’s a nice rundown of the story here from a Substack poster who focuses on special situations investing. My take, as someone who has not studied it that deeply and has never owned the shares, is that the management team has been trying very hard to effectively wrest control away from shareholders so they can continue to act in ways that either keep them entrenched or enrich them, perhaps including dilutive stock offerings to make (probably dumb) acquisitions, none of which fits what most investors seem to want of TPL… which is to mostly sit back and collect lease and royalty checks on the land it owns, and not spend any money unnecessarily.

I’d find it very hard to wade into the middle of that dispute, but the shares are at least back to a pretty reasonable valuation for a royalty company, roughly 20-25X free cash flow, after often spiking to more than 50-60X sometimes in the past. If I knew that Horizon Kinetics was going to win their shareholder lawsuits against this entrenched board and management team, I’d say this is an easy buy here — but it could be quite volatile, depending on how the courts and shareholder votes proceed. I cannot imagine Texas Pacific Land ever being bought out by anyone, not with the court battles raging and the board of directors and major shareholders still in the heat of battle, but, again, I guess you never know for sure.

Tired yet? Me, too, but we’ve got one more… thankfully, he gives this away for free, so we get to give the Thinkolator a rest…

“Company number five is Permian Resources… ticker symbol PR.

“And the reason why I’m giving you this one is simple – because it’s gives you the best chance to make money, fast.

“Permian is headquartered at the very heart of the Permian basin with 180,000 net acres to its name.

“It has an enterprise value of $7.4 billion and it’s been operating since 2015.

“In other words, it’s rock-solid.

“At the end of Q4 2022 it announced an adjusted free-cash-flow of $256 million, along with an impressive net cash from operations of an increased $528million.

“In short – like all five opportunities we’ve discussed today – Permian is a leading candidate for a takeover target in the first wave of M&A activity, owing to its ready-made set-up in prime locations and watertight financials.

“Right now, you can snap up shares of Permian Resources for just $10 a pop… and I recommend you do.”

Well, it’s down about 10% from where it was pitched right now, at about $9, and, like all the others, it’s cheap on an earnings basis (roughly 5X earnings, with a 30%+ earnings bump forecasted next year). They’ve fallen short of analyst forecasts about half the time in recent years, so that probably is keeping enthusiasm a little low, but, as with all such things, it’s mostly about production and drilling costs and oil prices. This was a popular story stock a while back, when it was known as Centennial Development, and it was also pitched as a “takeover trade” by Nathan Slaughter about a year and a half ago (it’s up about 40% since then, though their net income has roughly quadrupled).

Will someone buy one of these companies out and bring an options windfall for traders? Beats me. Maybe, I guess, but predicting it in a 3-9 month period, which is generally what’s available in the options market, is a lot more like horserace handicapping than investing.

Here’s how those five stocks have done over the past couple years, just to give you some indication of how volatile they were as oil recovered from the pandemic lows and then spiked after the Russian invasion of Ukraine, this should at least remind us that almost anything is possible for these commodity-driven stories — I threw in the S&P 500 for comparison, that’s the orange line that looks almost flat at the bottom, so most of thse (other than TPL) are now beating the S&P over the past two years… though none are beating Exxon Mobil (XOM), which is the dark green line at the top… PR, Baldwin’s “free” pick (in purple), has been the steadiest winner among this group of five “takeover targets”:

And, of course, you can’t get away from the cause of that volatility… which is, for the most part, the volatility of the commodity prices, something these companies do hedge to some degree, but can’t control. Here’s what the two main commodities have done over that same period of time — that’s WTI crude oil spot prices in orange, and natural gas in purple. Some companies are better than others at hedging and capex discipline, but most oil and gas companies end up riding those cycles up and down to at least some degree. Bull markets make oil companies look smart, bear markets make them look stupid.

TPL seems very unlikely to be acquired anytime soon, that’s a hot mess of a story and it’s hard to see anyone wading into it with a buyout offer, especially with so many disputes unsettled, but any of the others probably could be acquired if someone wants to invest in some more land and earnings power in the Permian… though it strikes me that most of the potential buyers are holding off and trying to preserve cash as oil prices falter this year, and trying to prove to investors that they’re good financial stewards and not inclined to pursue the “growth at any cost” drilling or acquisitions policies of past boom-and-bust Texas wildcatters.

So… whaddya think? Will oil be surging again later this year, as so many pundits predict? Will companies continue the “land grab” in the Permian Basin by buying out one or more of these teased companies? Have any favorites in the bunch, or others that you think are more compelling? Please let us know with a comment below.

P.S. We’ve never covered Baldwin’s Flashpoint Trader before, and readers always want to hear from actual subscribers — so if you’ve ever tried out the service, please click here to visit our reviews page for Flashpoint Trader and share your experience with your fellow Gumshoe readers. Thanks!