Analysts Say Producers Are Ripe for the Picking
The majors have had their day, now it's the independents' turn
in the merger mart, and analysts are targeting Burlington Resources
and possibly even Mitchell Energy as companies in play.
The time is right for independent producers to merge, according
to Joe Culp, an AG Edwards analyst. "The majors have already gone
through the merging fad. Now, they are so big that the North
American assets are turning out to be too mature and
labor-intensive to fit their needs. So, we think they're going to
sell them off and focus on international assets that have bigger
potential. This opens the door for these independent producers to
come in, buy up these North American properties, and make some real
money. They also should merge to diversify their assets because any
one of these fields could dry up."
The next three to six months will be an active time when "the
minnows are going to be gobbled up," said John Olson, an analyst
with Sanders, Morris & Mundy. He called Houston the "biggest
flea market in the solar system."
Burlington was the center of market speculation last week as
rumors of a Texaco takeover of Burlington made the rounds, but no
one wanted to go on the record as to whether or or when a deal
would go through. One theory is that with other mushrooming major
mergers, Texaco will have to bulk up to stay in the game. Others,
however, say it won't necessarily be a combination with another
producer and predict Texaco may head off in other directions.
As for Burlington, it's "ripe to get bigger, either on its own
or through somebody else," said analyst Fadel Gheit with Fahnestock
& Co. (NY). "The company has quality assets that would make it
quite attractive for a much larger oil company." For 1998, revenues
decreased 18% to $1.64 billion. Net income decreased 73% to $86
million. Revenues reflect lower oil and gas sales due to
divestitures and lower commodity prices. At year-end 1998,
Burlington's worldwide proved reserves totaled 8 Tcfe, the second
largest of any U.S. independent oil and gas producer. Natural gas
accounted for 80% of the reserves. Burlington also replaced 123% of
its 1998 worldwide production.
Gheit said a merger with Burlington would occur if the company's
stock reached the $45-50 level and it would involve a stock deal
with a 30% premium. On Wednesday morning, Burlington's stock gapped
up from $38.50 to $40 at the NYSE open.
One analyst, who wished not to be named, said Burlington's
assets make it the most attractive independent oil and gas producer
on the market. "Burlington's got the asset base that makes it more
attractive than any other independent [producer]. Its got long
reserves, stable gas production, a strong balance sheet, many
deepwater Gulf of Mexico projects. Plus, due to its concentrated
asset base, Burlington is an efficiently run company."
John Carrara, a Burlington spokesman, said "It is our policy not
to comment on speculation. Merrill Lynch did make us a 'Focus-one'
company and did write up a very nice report on us, which might have
led to the stock activity, but I cannot say anything about the
Meanwhile, Olson described Mitchell as "the crown jewel" of the
oil and gas producer merger candidates. The producer replaced 185%
of its gas reserves last year. The company is led by 79-year old
George Mitchell who owns between 55% and 60% of the stock.
President Bill Stevens, retired Exxon USA president, brought in
about five years ago, has done some housecleaning and all the real
estate is gone. Olson said Mitchell's holdings are about 89% gas
with proved reserves of 867 Bcf and 16.2 million BOE. For 1998, the
company reported a net loss of $49.7 million compared with the
previous year when the company had a net loss of $35.1 million.
"It's really the last classical Texas gas gatherer out
there...the last of the Mohicans. They have their own reserves,
gathering systems, natural gas liquids plants and marketing
operations. They are an unregulated intrastate producer. Mitchell
has a good balance sheet, low finding costs, and tons of reserves.
The stock is at $13 right now. I think it could get up to $18.75
and then it will be an attractive candidate," Olson said. With 49
million shares that would put the value of the company at about