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Analysts Say Producers Are Ripe for the Picking

March 29, 1999
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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 &amp 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 &amp 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 merger rumors."

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 $920 million.

John Norris

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