Under the Radar: Canadian Energy Companies

If it works, keep doing it.

That is the mantra for this edition of "Under the Radar," our weekly look at news you may have missed and how it might make you money in the weeks and months ahead.

Before a long-anticipated week in the Upper Peninsula of Michigan (someplace I highly recommend you visit for a real change of pace), we devoted this entire column to Canadian companies. Most importantly, we suggested that Anderson Exploration (AXN) was in play and that sources suggested they were in talks with Anadarko Petroleum (APC).

Right target, wrong suitor. Indeed, on Tuesday Anderson sold to another U.S. energy heavyweight, Devon Energy (DVN), for a 50%-plus premium. While we may never know, well-placed sources tell me Devon trumped an initial bid from Anadarko. The companies would not confirm the process.

Good call? Yes. A certain thing? Far from it. Remember, when we talk of takeover speculation it is just that -- speculation. And while the information can be helpful in building positions, it is not without risk. What made this deal work was that Anderson was a solid company, management was motivated to do the right thing for shareholders, and there is a real push among U.S. natural gas producers to grow production -- which means additional acquisitions.

Look at the anecdotes, the murmurs and the nuggets in this column as yet another tool for your toolbox. Use it to either confirm or begin your research into ideas for your portfolio. I wish they all worked like the Anderson intelligence, but reality is they won't.

Looking Northward, Again

Devon's acquisition of Anderson certainly sent a number of Canadian natural gas companies higher on speculation of who might be next. Names like Rio Alto (RAX:Toronto) and Canadian Hunter Resources (HTR:Toronto) are examples of companies that moved higher on speculation that they may find U.S. suitors.

While certainly in play, two other Canadian names may provide investors with energy plays while also benefiting from the merger speculation.

Alberta Energy (AOG) has a profile similar to Anderson and often is the subject of combination talk with U.S. companies. "Fantastic assets, another Canadian Crown Jewel," says Scott Walters of Research Capital in Toronto. "There are a lot of companies that would love to have Alberta's assets."

A Jewel With Some Bounce Talk gets a rise out of Alberta Energy stock

The stock has added nearly 10% since the Anderson announcement, but if recent deals are any indication, Alberta could bring close to $50 per share, a 35% premium to current prices.

Unlike Anderson, no suitor's names have surfaced with Alberta, and the company has not indicated it is interested in selling. However, very much like Anderson, Alberta Energy is a company you can feel comfortable owning if you believe in the longer-term fundamentals of the natural gas market.

Another name swirling around Canadian trading desks is Husky Energy (HSE:Toronto), Canada's fifth-largest energy producer. A majority of the company is held by Hong Kong magnate Li Ka-shing.

Husky has a large inventory of "heavy" oil, a lower-quality crude that is more costly to refine. Still, combined with its refining and gasoline marketing assets, Husky appears to be in some company's scope.

"The market is suggesting the company is in play," says Research Capital's Walters.

The question is who. One Canadian trader suggests Conoco might be looking. Earlier this year, Conoco acquired Gulf Canada and has indicated an interest in expanding its presence north of the border. Among the Canadian companies mentioned as possible buyers is Canadian Natural Resources (CED), another large player in heavy oil.

Price may be a problem in any deal for Husky. Li Ka-shing is likely to demand a substantial premium for the company, possibly scuttling any deal. Sources suggest an acceptable price is probably near $25 Canadian, a 35% premium to today's price. That's on top of a 20% gain in the stock as rumors swirled about possible deals this week.

The company would not comment on any deal speculation at a Peters & Co. energy investment conference in Toronto this week.

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