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Analysts Say Producers are Ripe for the Picking

Analysts Say Producers are Ripe for the Picking

Don't get sick of merger-mania quite yet, warns All Star Oil analyst Fadel Gheit. Burlington Resources is leading the next wave of attractive independent oil and gas producers that are ripe for takeover, he claims.

"I think [Burlington] is ripe to get bigger, either on its own or through somebody else., Gheit said yesterday. "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 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'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 $39.50 to $40 at the NYSE open.

"It is our policy not to comment on speculation," said Burlington 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 say anything about the merger rumors."

Joe Culp, an AG Edwards analyst, said the time is right for independent producers to merge. "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." To prove his point, Olson pointed to Enron Oil & Gas being shopped around (See Daily GPI, Dec. 17) and the recent merger between Sonat and El Paso (See Daily GPI, March 16) as evidence that merger-mania is alive and still thriving.

He said "the crown jewel" of the oil and gas producer merger candidates is Mitchell Energy. The producer replaced 185% of its gas reserves last year. The company had proved reserves of 867 Bcf of gas and 16.2 million BOE. For 1998, Mitchell Energy reported a net loss of $49.7 million compared with the previous year when the company 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 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."

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