Natural Gas Acquisition Targets, Part Two

Jim Brown
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Yesterday I profiled Range Resources, Ultra Petroleum and EnCana as potential takeover targets after Exxon raised the bar with its acquisition of XTO. Today I am going to add EOG, Anadarko and Devon.

You can read the first part of this article at this link. Who Will Be Next? To recap, Exxon announced last week that it was buying XTO Energy for $41 billion in stock and debt assumption. This was the biggest deal in the gas patch since ConocoPhillips acquired gas giant Burlington Resources in 2005 for $36 billion.

This move by Exxon sets the stage for another round of consolidation in the sector. As wells become more expensive to drill and land costs rise the smaller players are going to have a hard time competing with the giants like Exxon, Conoco and Chesapeake. It would be better for them to be acquired today than find themselves continually pushed aside by bigger numbers and larger clout when bidding on leases and available rig resources. As a land owner who would you rather lease to, Exxon or Joe's Water and Gas Drilling Company? Obviously your chances of having big wells would be better with Exxon.

Devon Energy DVN could be a target but with a market cap of just over $30 billion it would be a expensive acquisition and now that Exxon is out of the picture the rest of the acquirers are not as flush with cash and stock as Exxon. It may be tough to pony up $40 billion to put a premium on Devon for the shareholders.

Devon has proven reserves of 2.4 billion barrels of BOE as of the end of 2008. Devon is not just an onshore USA producer. They have properties in Canada, the Gulf of Mexico and internationally. They are in the process of divesting the international assets to reduce their geopolitical risk. They are also looking to get out of the offshore assets to escape hurricane risk. They suffered some hurricane losses over the last five years and those are expensive problems. Even when there are no hurricanes the cost to drill and produce in the gulf is very high. Devon is trying to refocus to onshore assets and primarily in natural gas.

Since they are already in the divesting process this might be the right time for an acquirer to come knocking on the door. If hypothetically they could get $10 billion for the GOM assets and another $5B for the international leases then the cost of the gas business would be very manageable for the acquiring company. Plus if the acquirer was an oil major then the Devon oil assets in the gulf might be acquired cheap and added to the acquirers portfolio.

Devon is also active in the transportation of nat gas in the U.S. and marketing of nat gas and NGLs and constructing pipelines and storage facilities to move these products. If a big player wanted to get in the gas business then Devon has a few more parts to the puzzle than a company like Ultra, which is primarily a driller. I would put Devon high on the target list but also remember that it would take a big player to make the marriage work. Devon is up +10% over the last week.

Chart of Devon Energy

Anadarko Petroleum (APC) is another heavy hitter with a $31 billion market cap. Anadarko is also divesting its non core assets around the world in favor of local land based reserves. Last December Anadarko sold ite 50% ownership in a heavy oil field offshore Brazil to Statoil-Hydro. They also sold oil and gas properties in Brazil and the Gulf of Mexico. That hurricanes that blew through the gulf over the last decade have been very expensive to exploration and production companies with facilities in the gulf. Quite a few like Devon and Anadarko are leaving for safer, less expensive, locations.

Anadarko has 2.28 billion barrels of BOE in proven reserves. If you thought oil prices were going back over $125 by 2012 then buying oil assets along with your gas today would be a wise move. Typically acquisition costs in a merger like XTO range in the high teens per BOE. I believe XTO went for $18 per BOE. $18 is a long way from $125 but the more gas in the mix the lower price received for each BOE.

Anadarko also has some gas gathering, processing and transporting assets in addition to their own production. This has added value to any acquirer. Anadarko has rallied about 12% since last week.

Chart of Anadarko

EOG Resources (EOG) is a company that flies under the radar and gets very little press. EOG "explores, develops, produces and markets nat gas and crude oil primarily in the U.S., Canada, Trinidad, the UK, North Sea and other international areas" according to their profile. They ended 2008 with 8.7 TCF of proven reserves including 225 million barrels of oil. 71% of their reserves are in the U.S., 15% in Canada and 14% in Trinidad. Since those three areas add up to 100% you have to wonder what they are doing in the North Sea, UK and "other international areas."

EOG s active in the Barnett Shale in an area that also produces oil. They have acquired 90,000 acres in this area north of the traditional Barnett Shale area. They plan to drill 225 oil wells in this area in 2010. 81% of their reserves are in natural gas and 19% in crude oil. Gas production increased +15% in 2008 while oil and liquids production rose +61%.

EOG has not been getting much mention as an acquisition target but its stock price has climbed nearly $10 in the last week. Because they don't have the storage, transportation and marketing of Devon and Anadarko they are seen as less likely an acquisition target but I would not rule them out.

Chart of EOG

A survey over the last week and who investors believed would be the next acquisition target favored Chesapeake by nearly 2:1. Devon and Anadarko were tied for second place. Because of the Chesapeake partnership with BP I view them as a less attractive target. Anyone taking a run at CHK would have to deal with BP's interest and the potential for BP to step in front of any offer. This could send qcquirers off in search of other prospects.

Tomorrow I will close this chapter with the last group of producers worthy of coverage.

Jim Brown