The majors have had their day, now it’s the independents’ turnin the merger mart, and analysts are targeting Burlington Resourcesand possibly even Mitchell Energy as companies in play.

The time is right for independent producers to merge, accordingto Joe Culp, an AG Edwards analyst. “The majors have already gonethrough the merging fad. Now, they are so big that the NorthAmerican assets are turning out to be too mature andlabor-intensive to fit their needs. So, we think they’re going tosell them off and focus on international assets that have biggerpotential. This opens the door for these independent producers tocome in, buy up these North American properties, and make some realmoney. They also should merge to diversify their assets because anyone of these fields could dry up.”

The next three to six months will be an active time when “theminnows are going to be gobbled up,” said John Olson, an analystwith Sanders, Morris &amp Mundy. He called Houston the “biggestflea market in the solar system.”

Burlington was the center of market speculation last week asrumors of a Texaco takeover of Burlington made the rounds, but noone wanted to go on the record as to whether or or when a dealwould go through. One theory is that with other mushrooming majormergers, Texaco will have to bulk up to stay in the game. Others,however, say it won’t necessarily be a combination with anotherproducer and predict Texaco may head off in other directions.

As for Burlington, it’s “ripe to get bigger, either on its ownor through somebody else,” said analyst Fadel Gheit with Fahnestock&amp Co. (NY). “The company has quality assets that would make itquite attractive for a much larger oil company.” For 1998, revenuesdecreased 18% to $1.64 billion. Net income decreased 73% to $86million. Revenues reflect lower oil and gas sales due todivestitures and lower commodity prices. At year-end 1998,Burlington’s worldwide proved reserves totaled 8 Tcfe, the secondlargest of any U.S. independent oil and gas producer. Natural gasaccounted for 80% of the reserves. Burlington also replaced 123% ofits 1998 worldwide production.

Gheit said a merger with Burlington would occur if the company’sstock reached the $45-50 level and it would involve a stock dealwith a 30% premium. On Wednesday morning, Burlington’s stock gappedup from $38.50 to $40 at the NYSE open.

One analyst, who wished not to be named, said Burlington’sassets make it the most attractive independent oil and gas produceron the market. “Burlington’s got the asset base that makes it moreattractive than any other independent [producer]. Its got longreserves, stable gas production, a strong balance sheet, manydeepwater Gulf of Mexico projects. Plus, due to its concentratedasset base, Burlington is an efficiently run company.”

John Carrara, a Burlington spokesman, said “It is our policy notto comment on speculation. Merrill Lynch did make us a ‘Focus-one’company and did write up a very nice report on us, which might haveled to the stock activity, but I cannot say anything about themerger rumors.”

Meanwhile, Olson described Mitchell as “the crown jewel” of theoil and gas producer merger candidates. The producer replaced 185%of its gas reserves last year. The company is led by 79-year oldGeorge Mitchell who owns between 55% and 60% of the stock.President Bill Stevens, retired Exxon USA president, brought inabout five years ago, has done some housecleaning and all the realestate is gone. Olson said Mitchell’s holdings are about 89% gaswith proved reserves of 867 Bcf and 16.2 million BOE. For 1998, thecompany reported a net loss of $49.7 million compared with theprevious year when the company had a net loss of $35.1 million.

“It’s really the last classical Texas gas gatherer outthere…the last of the Mohicans. They have their own reserves,gathering systems, natural gas liquids plants and marketingoperations. They are an unregulated intrastate producer. Mitchellhas 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 $18.75and then it will be an attractive candidate,” Olson said. With 49million shares that would put the value of the company at about$920 million.

John Norris

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