Buyout Boom Being Seen in Domestic Energy Field

To the quick go the spoils. In Wall Street, that means lasso tomorrow’s trends today, which is the prime way to make money in the stock market. A crackerjack in this respect – especially in oil and gas – is Alan Gaines, a former Street energy analyst for 17 years who catered chiefly to institutional investors.In mid-December, he told me to keep a sharp eye on the major independent domestic oil and gas companies. The reason: He envisioned a slew of takeovers, one of which was Unocal, one of the country’s largest energy exploration companies.Lo and behold, about two weeks ago, the business wires ran a piece that CNOOC, Ltd, a big Chinese oil and gas producer that’s prepared to spend $3 billion on acquisitions, may be eyeing Unocal. That revelation sparked about an 11.5% jump in Unocal’s shares over the next several trading sessions.No, it wasn’t a case of Mr. Gaines, who has a stock position in Unocal, being privy to inside information, but rather his strong belief that a wave of takeovers of independents with hefty oil and gas reserves is inevitable and likely sooner rather than later. Further, he feels such companies will evolve into the market’s new blue chips. Likewise, he expects energy – which ran rings around the market last year with a gain of nearly 29% – to be the stock market’s hottest sector over the next decade.In a follow-up chat, Mr. Gaines, currently CEO of Dune Energy, a Houston-based oil and gas producer that’s 78% owned by one of Russia’s largest natural gas companies, Itera Holdings, argues that a “takeover boom” is a virtual certainty because of the scarcity value of large independents. There are just not that many left, he points out.Here’s a rundown from our ex-analyst of the independents, most of whose stocks he personally owns, that he expects will all be gobbled up within the next three to five years, plus their closing prices on Friday and his projected per-share buyout prices:Unocal ($46.71), estimated takeover: $68 a share; Kerr-McGee ($59.78), est. takeover: $94; Vintage Petroleum ($22.67), est. takeover: $37; Chesapeake Energy ($16.86), est. takeover: $26; Pioneer Natural Resources ($33.53), est. takeover: $44; Pogo Producing ($46.35), est. takeover: $66; Devon Energy ($39.44), est. takeover: $51; Apache Petroleum ($51.38), est. takeover: $57; Anadarko Petroleum ($63.90), est. takeover: $108; His two favorites – the companies Mr. Gaines views as the most likely takeover candidates – are Vintage Petroleum and Unocal.The acquisitions of independents, he tells me, won’t see big fish swallowing small fish, but rather whales swallowing smaller whales. In brief, he sees such biggie acquirers as state-owned oil companies (from the likes of Brazil, China, India, France and Venezuela) and the giant integrated oil companies (such as Exxon-Mobil and ChevronTexaco). Another takeover catalyst, Mr. Gaines notes, is that current stock prices of the big independents reflect an oil price of sub-$30 a barrel (the current price for a barrel of light crude is $48.53). Speaking of the oil price, Mr. Gaines doesn’t see it going below or even near $30 a barrel, which means, he adds, continued higher earnings and cash flow and higher valued reserves.Meanwhile, what happens if there are no acquisitions? Mr. Gaines is still gung-ho on the big independent energy producers, all of which, he believes, are solid candidates on their own for sizable appreciation and offer very limited risk. He adds that “if I’m wrong and the stocks should fall, it will only speed up the acquisition process.” He also notes that most independents are loathe to put all of their cash into the ground because of the scarcity of good projects. As a result, they’re starting to become much more shareholder-oriented by using discretionary cash to repurchase stock and increase dividends. Mr. Gaines figures each of his nine independents should outperform the market over the next 12 months and is ripe for a gain in this period of 20% to 25%. “I would pick a basket of these stocks, say four or five of them, and I think you’ll hit a lot of home runs,” he said.

Buyout Boom Being Seen in Domestic Energy Field

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