The Rude Awakening
Wall Street, New York
Friday, January 6, 2006 ------------------------- - What does a giant oil company look for in an
acquisition target?
- Kurt Wulff called his home run a year ago...it might
be time to listen up and,
- Playing liar's poker with your toes in the pacific
------------------------- Joel Bowman, reporting from the golden sands of Rancho
Santana, Nicaragua... As the sun was setting over the Pacific just last eve and
the lobster was settling in my stomach, I was invited to
sit in on a game that I was somewhat familiar with: Liar's
poker. Michael Lewis penned a book of the same name all about the
stock market frenzy back in the 80's. Traders and brokers
would engage in cutthroat games of liar's poker right there
on the floor. Often the stakes would be six and even seven
figures. Lewis recounts the stories with the passion and
vigor so often associated with the Wall Street of that
particular decade. Last night's game was not a game of millionaires and
wealthy traders. The stakes were far less. The general premise of the game is similar to that of
regular poker. The only real difference is that your hand
is dealt in the form of a one-dollar bill. Your 'cards' are
represented by the serial number on that bill: a zero being
a ten, a one counting as an ace and so on. Each player
takes turns in guessing the cumulative number of any given
'card,' around the table until players lose their nerve and
fold. "I say three fours," our new friend, Chris the carpenter,
offers. "Five fours," is the next bet. Leave it to the fearless publisher of Whiskey & Gunpowder,
Greg Grillot, to raise the stakes to the next bar. "Seven tens," he proclaims to a murmuring of the crowd and
a few shaking heads. We didn't end up walking with any more than we came with
after all was said and done on the liar's poker table last
night. That was never the motivation. I am no gambler at
the best of times, having always lost any money I have
waged. The main reason is that I have never bothered to
study the rules intensely enough to maximize my chances at
winning. When you invest money in the stock market, it is much like
placing a bet in a game of liar's poker. Mostly it is
speculative, but the risks can by mitigated with the proper
research and knowledge of the rules. Our good mate, Matt
Badiali, has been doing just that with the oil market. Read
on below for all the oil soaked news...
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By Matt Badiali Kurt Wulff called his shot a year ago. It was the financial equivalent of standing at home plate
and pointing to the right field fence, then hitting the
next pitch out of the park. He did it in a Barron's
interview last year. Wulff, the founder of McDep Associates, followed Burlington
Resources for years. It was one of his favorite stocks.
Last year, he forecast the stock price would advance to $86
AND suggested ConocoPhillips might buy the company. Last
month, ConocoPhillips announced a buyout of Burlington
Resources for around $89.50 per share! Kurt, I'm listening now! In a recent Barron's interview, Kurt reiterated his bullish
stance on the energy sector. He believes we'll have $150
per barrel oil by 2010. Kurt's take on natural gas prices
is similarly bullish. He thinks $15 per thousand cubic feet
(mcf) is the right price. Regardless of the exact prices, I
agree with his positive outlook for oil and gas. Kurt Wulff and I also happen to agree about the three
companies that would be most likely to be taken off the
board in acquisitions. What does a giant oil company look for in an acquisition?
Primarily, it wants proven reserves. Second, it wants
potential reserves in the form of exploration properties
and specific drilling prospects. Now that we've identified
what the buyers want, how do you sort the wheat from the
chaff? Just like in real estate, there are three important
considerations: location, location, location. I'll use four buyout deals to illustrate the point: Norsk Hydro/Spinnaker Deal This deal was not about proven reserves; it was about
potential reserves. No company in the world would pay $40
per BOE unless it gained something else as well. The deal
was about exploration acreage in the Gulf of Mexico.
Spinnaker had a strong position in the Gulf. Norsk Hydro
wanted a presence there. As a bonus, Spinnaker had a huge
library of 3-D seismic data and a backlog of drilling
locations. As those positions get drilled, Norsk Hydro's
proven reserves will increase substantially. CNPC/PetroKazakhstan Deal Kazakhstan opened to foreign oil exploration in 1991. There
are 200 known fields located both onshore and in the
Caspian Sea. The country is ripe for continuing exploration
and the likelihood of finding new large oil fields is very
good. PetroKazakhstan was a small exploration company with some
very promising acreage. Its assets were so good that they
triggered a bidding war among CNPC, LUKOIL, and the Indian
State Oil Company. CNPC won. Lukoil wanted acreage in
Kazakhstan so badly that when it lost out on
PetroKazakhstan, it acquired an even smaller exploration
company in the region. Occidental Petroleum/Vintage Petroleum Deal This third acquisition was also about real estate. In
October 2005, Occidental Petroleum acquired Vintage
petroleum for $3.5 billion. Occidental admitted that the
primary motivation for the acquisition was Vintage's assets
in California and Argentina. The growth opportunities in
those regions fit with Occidental's expansion strategy.
ConocoPhillips/Burlington Resources Deal This deal was about acquiring natural gas in North
Amerrica. The merger creates a new super-major (with a
market cap north of $100 billion). The deal makes
ConocoPhillips the largest natural gas producer in North
America, the mantle once worn by EnCana. The deal makes sense for ConocoPhillips, especially since
the company is currently investing heavily in LNG and in a
budding gas-to-liquids technology. The Burlington deal increased Conoco's proven reserves by
25% AND increased its current production capacity by 30%.
Since the current price of natural gas is 180% higher than
a year ago, it doesn't hurt to have a lot of production
right now. Furthermore, the Burlington takeover gives
Conoco a vast range of exploration properties. So which companies might be next in line to attract a
takeover deal from a major oil company? To begin answering
that question, we must look at the valuations of
prospective takeover targets relative to recent deal
prices. When Chevron boosted its proven reserve base by 21% by
acquiring Unocal for $16 billion, it paid $9.35 per barrel
of oil equivalent (BOE). But Conoco's bid for Burlington
represented a price of almost $17.50 per BOE. Clearly,
Conoco believes that Burlington's sizeable exploration
properties hold huge potential. Whatever the case, we can
see that recent acquisitions took place between $9.50 and
$17.50 per BOE. The table below, therefore, values
prospective takeover targets at both price points. Company | Proven Reserves | Current Stock Price | Share Price at $9.50 per BOE | Share Price at $17.50 per BOE | Anadarko | 2,365,000,000 | $98 | $96 | $176 | Apache | 1,937,000,000 | $72 | $56 | $103 | Devon | 2,293,000,000 | $66 | $49 | $90 | EnCana | 2,610,000,000 | $50 | $29 | $53 | Occidnental | 2,486,000,000 | $84 | $59 | $108 | Kerr-McGee | 1,218,000,000 | $94 | $99 | $178 |
As you can see, most of the independent companies' proven
reserves are valued at more than $9.50 per barrel, but
still less than $17.50 per BOE. Now that the super-majors
are shopping for reserves, which companies might be the
next takeover targets? I'd bet on Anadarko, Devon, or
Occidental. Company | Market Cap | Net Acres | Percent Undeveloped | Proved Reserves | Anadarko | $23,400,000,000 | 26,305,000 | 54% | $2,365,000,000 | Devon | $29,600,000,000 | 25,589,000 | 79% | $2,293,000,000 | Occidental | $34,870,000,000 | 50,337,000 | 93% | $2,486,000,000 |
All three companies have several things in common. First,
they are selling at a significant discount to net present
value. Second, their proved reserves are selling at less
than 75% of current market prices. Finally, they have vast
areas of prime, oil- and gas-rich, undeveloped acreage that
an acquirer would get "for free" when buying those cheap,
proved reserves. Next Tuesday, I'll take a look at each of these companies
in a little more detail... [Joel's Note: A huge move is about to go down in the oil
industry, a move that could see you rake in serious
earnings. Matt Badiali has put together a comprehensive oil
report illustrating this move and exactly how to play it
for maximum profit potential. If you are interested in
reaping the rewards of this valuable research, I urge you
to read on below...this is an opportunity you don't want to
miss. The S&A Oil Report
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is still cheap! http://www.agora-inc.com/reports/PNY/EPNYG126 ------------------------- [Joel's Note: If you have any comments or suggestions on
today's column, please pen them, insert into a bottle and
set adrift in the Pacific Ocean. I will make sure I am out
surfing this afternoon,just so I don't miss it. Alternatively, you can always just write an e-mail to
aussiejoel@the-rude-awakening.com Cheers, Joel | 
