Takeover Climate in Oil and Gas

A decline in oil and gas stock prices that we believe is overdone relative to the price of oil may trigger more strategic acquisitions by well-capitalized buyers. When oil price pulled back in 1981 after a long rise, the megadeals began in earnest and continued for several years. Buyers could be among the largest in our coverage as well as non-U.S. entities not in our coverage. Targets could be any of the low McDep Ratio stocks, particularly those that are widely held.

Large cap targets, also down the most from their highs, include buy recommendations XTO Energy (XTO), EOG Resources (EOG), Canadian Natural Resources (CNQ), Anadarko (APC), Encana (ECA) and Suncor (SU). Meanwhile, considering that the median stock in Meter Reader is down 25% from its high, most of the damage has been done if we are on the way to a typical serious decline of a third.

Investors who want to be out of stocks at prices below the 200-day average should now be mostly out as practically all Meter Reader stocks are in a declining price trend. Crude oil remains in a rising trend with the six-year quote of 120 above the 40-week average of 105 and off 16% from its high. At a median McDep Ratio of about 0.7, stock prices appear to be consistent with long-term oil price of about $70 a barrel, close to the widest discount to oil futures for the past five years. We believe our buy recommendations are quality stocks and we expect them to be rewarding for patient investors.

Originally published on Aug. 5, 2008

Comments

[redbaron:]

Kurt Wulff is the best analyst in this sector. Listen to him carefully. I have been investing using his advice for several years, and it has been very rewarding. Thank you Mr. Wulff.

2008 Aug 28 09:12 AM

[Bobco23:]

It is surprising the M&A activity has not yet begun. Watching BP get "thrown around like a rag doll" (Jeff Imelt, GE CEO) by Russia; XOM, CVX, and COP operations getting nationalized by Chavez; Nigeria's ethnic/religious/polit... unrest; and the standard middle east fare, one would think "safe" resources would be on the major's "buy now" shopping list. The next tier companies with comparatively "safe" resources would be the obvious targets: APC,APA, CNQ, and maybe OXY, MRO, HES. Any other targets?

2008 Aug 28 09:17 AM

[Mmarrkk:]

Have you ever listened to a conference call where the so-called expert analysts give the CEO's huge amounts of grief about acquisitions? COP was villified by these analysts for their acquisition of Burlington, a move that now appears to be a huge winner. And every quarter thereafter, one of the "smart" young guns asks a question with a clear tone of "You aren't thinking about another big acquisition, are you??" as if to say we've got our finger on the trigger, baby, so just try one!!

Unfortunately, that will really slow down the M&A market overall for the big guys. And they may be the only ones with the money to do these sized deals. But you are spot on...these are great companies and with their recent declines in price, selling at attractive values.

2008 Aug 28 09:54 AM

[Francorp:]

XTO is a strong buy right now.

2008 Aug 28 10:07 PM