Who Will Be Next?

Jim Brown
 
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The Exxon acquisition of XTO has started the acquisition wheel turning and everyone wants to know where it will stop. Who will be the next to be acquired now that Exxon has validated the unconventional shale gas as a valid reserve asset.

The search is on for the next takeover candidate and matching them with the acquirer will take a certain set of matchmaking skills. There are plenty of big oil companies that see the handwriting on the wall pointing to natural gas as the next big fuel. Oil supplies are dwindling, at least those in the public domain and those that are left are very expensive to produce.

Moving from oil to natural gas is the logical direction because gas wells are much cheaper to drill than an offshore well and they don't have any meteorological risk. Hurricanes rarely disrupt existing wells on dry land and most shale gas plays are well inland and insulated from weather risk by other than a stray tornado.

With technology improving for drilling shale gas the lure of the gas field is tempting international oil companies to move into the gas patch. Companies like Royal Dutch Shell, Total SA, BP and ENI are already buying up leases in the U.S. and partnering with existing gas producers to develop more sites.

With gas prices on the rise now that winter is finally kicking into high gear the window of opportunity for a cheap acquisition is closing. Every dollar gas moves higher adds billions in value to those companies that may be acquisition targets.

Those being discussed as possible targets include Anadarko Petroleum, EOG Resources, EnCana Corp, Ultra Petroleum and Range Resources. BP has already entered into a deal with the U.S. top producer, Chesapeake so that takes them off the initial acquisition list. Also as the largest producer the cost to acquire them would be in the $25-$30 billion range and there are no other companies willing to cough up that much capital to get into the shale gas business. Exxon took the biggest bite first leaving the rest of the herd for the smaller companies to divide and conquer.

Range Resources (RRC) has accumulated 1.4 million acres of leases in the Marcellus Shale. That formation runs from southern New York down through Pennsylvania and West Virginia. With a current market cap of $7 billion it ranks as one of the small fish and RRC stock has rallied about 15% since last Wednesday on speculation they could be a target. RRC has 2.7 tcf of proven reserves and a total of 3.694 million acres under lease with over 12,000 plotted and planned drilling locations.

Range Resources Chart

Ultra Petroleum could also be a target with a market cap of $8 billion and a proven knowledge of shale production. Ultra has sold off non core assets over the last couple years to focus on high volume gas wells in the Green River Basin in Wyoming. Ultra owns 121,432 acres in Wyoming and is drilling some wells on as little as a 5-acre spacing. They own an interest in 984 producing wells and operate about 50% of them. They recently acquired 287,745 acres in the Marcellus Shale in Pennsylvania. Ultra would be a target more for their long life wells. They produced 45.9 bcfe in Q3-2009, a 27% increase over 2007. They have one of the smallest costs in the industry of $2.48 per Mcfe. They are projecting production growth of 15-20% for both 2010 and 2011. Ultra has gone up roughly +11% in price in the last four days.

Ultra Petroleum Chart

EnCana is also being discussed as a potential target after it announced it was splitting up the company into an oil company and a gas company. Encana split into Cenovus Energy, an oil company and EnCana Corp a pure play natural gas company to unlock the potential in the stock. Having a major natural gas producer tied down with billions in oil sands development confused investors. They did not know how to value the company and how to assign risk. On Dec-9th Encana completed the split. Post split the market cap of EnCana is roughly $23 billion. In 2008 EnCana consolidated its holdings to North America and sold its assets in France and Qatar. EnCana used the proceeds from those sales to acquire substantial acreage in the Haynesville Shale. EnCana has risen about 10% in the last four days.

EnCana Chart

Stay tuned and tomorrow I will update three more potential takeover targets.

Jim Brown

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