Activist investors have got their eyes on energy stocks

Pisani: Energy in the green

Activist investors are looking for new bets, and their next picks could be in the downtrodden oil patch.

After a rebound in commodity prices and amid subsiding sector worries, three sources who spoke to CNBC think billion-dollar hedge funds that have in the past nudged corporate boards toward bigger buybacks and dividends will next look for investments in the energy sector. And that could lead to the next wave of M&A deals big and small in the oil and gas sector.

"Energy companies are going to start seeing pressure from their lenders, and from their shareholders, to start cutting deals now that there has been a stock market rebound," one banker who works on activist deals said. "Anyone who bought in at the beginning of this year is looking for ways to maximize profit."

For many big oilfield services companies, share prices have rebounded after falling earlier this year — but stocks are still well off their highs of 2014, before commodities tanked. The same can be said for energy-industry bonds, ranging from investment-grade paper to high-yield debt, despite commodity prices not keeping pace with rising stocks.

Still, some companies that could be targeted for deals have not fully rebounded. One source said that could be a hang-up for investors who bought into the sector while oil was highly valued, who are still in the red from the 2014 plunge in commodity prices. Even in a year where Washington regulators are killing deals left and right (including the now-defunct Baker Hughes-Halliburton combination), there is appetite for major mergers and acquisitions, a lawyer who works on sector deals said.

Crude oil sprays from a well bucket.
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General Electric was suggested by a source as a potential buyer, coming at a time when the industrial company is completing a thorough transformation and after having cut its financial services business. The company did not respond to CNBC's request for comment.

A pair of sources said they expect private equity in the sector to take off, factoring in companies that own debt in energy companies as well as the private equity investors who control the equity positions in others. Among the bigger, independent companies Wall Street believes could be bought is Weatherford International, an oil and gas service company. Shares in Weatherford are down nearly 40 percent this year, as of Tuesday afternoon.

"Weatherford would probably prefer to not sell at the depth of the market," one banking source said.

Weatherford did not respond to a request for comment.

At a time when there is growing concern that a recent favorite implement of activist investors, dividends, could begin to dry up, bankers and hedge fund investors alike are looking toward energy companies as a potential source of M&A and profits. Some say that in the event of a recession, investors can depend on better returns from energy companies if consumer spending enters a downturn.

Last year, energy sector M&A was very active, despite falling commodity prices, data from Dealogic show — and deal-makers have remained busy in 2016, as utility and energy M&A was the fourth-busiest sector for announced deals in the first half of the year, according to the data.

"It's not going to be easy to get debt for an energy deal," one sector source said. "But, there can be a lot of stock-for-stock deals, and right now people are looking to buy."