Don’t get sick of merger-mania quite yet, warns All Star Oilanalyst Fadel Gheit. Burlington Resources is leading the next waveof attractive independent oil and gas producers that are ripe fortakeover, he claims.

“I think [Burlington] is ripe to get bigger, either on its ownor through somebody else., Gheit said yesterday. “The company hasquality assets that would make it quite attractive for a muchlarger oil company.” For 1998, revenues decreased 18% to $1.64billion. Net income decreased 73% to $86 million. Revenues reflectlower oil and gas sales due to divestitures and lower commodityprices. At year-end 1998, Burlington’s worldwide proved reservestotaled 8 Tcfe, the second largest of any U.S. independent oil andgas company. 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’sstock reached the $45-50 level and it would involve a stock dealwith a 30% premium. On Wednesday morning, Burlington’s stock gappedup from $39.50 to $40 at the NYSE open.

“It is our policy not to comment on speculation,” saidBurlington spokesman John Carrara. “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 sayanything about the merger rumors.”

Joe Culp, an AG Edwards analyst, said the time is right forindependent producers to merge. “The majors have already gonethrough the merging fad. Now, they are so big that the NorthAmerican assets are turning out to be too mature and laborintensive to fit their needs. So, we think they’re going to sellthem 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 analyst withSanders, Morris & Mundy. He called Houston the “biggest fleamarket in the solar system.” To prove his point, Olson pointed toEnron Oil & Gas being shopped around (See Daily GPI, Dec. 17) and the recent mergerbetween Sonat and El Paso (See Daily GPI,March 16) as evidence that merger-mania is alive and stillthriving.

He said “the crown jewel” of the oil and gas producer mergercandidates is Mitchell Energy. The producer replaced 185% of itsgas reserves last year. The company had proved reserves of 867 Bcfof gas and 16.2 million BOE. For 1998, Mitchell Energy reported anet loss of $49.7 million compared with the previous year when thecompany had a net loss of $35.1 million.

“Its really the last classical Texas gas gatherer out there.They have their own reserves, gathering systems, natural gasliquids plants and marketing operations. They are an unregulatedintrastate producer. Mitchell has a good balance sheet, low findingcosts, and tons of reserves. The stock is at $13 right now. I thinkit could get up to $18.75 and then it will be an attractivecandidate.”

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