Fast-growing U.S. power producer Calpine (CPN:NYSE - news - boards) is rumored to be mulling a bid for Rio Alto Exploration, a Calgary-based oil and gas company with a stock market worth of around $1.6 billion.

Calpine, which needs large amounts of cheap natural gas to secure strong profits from its predominantly gas-fired plants, announced plans last month to acquire Canadian oil and gas producer Encal (ECA:NYSE - news - boards) in a $1.2 billion deal. In early February this column correctly predicted that San Jose, Calif.-based Calpine was about to buy Encal.

Neither Calpine nor Rio Alto, listed on the Toronto Stock Exchange, returned calls seeking comment on a possible deal. Chatter about a deal picked up in Calgary last week, according to a local oil and gas analyst who requested anonymity. (The brokerage he works for has done no underwriting for either Rio Alto or Calpine.)

Let's be clear: Current scuttlebutt about a Calpine purchase of Rio Alto is considerably more speculative than talk preceding the Encal transaction. Before Calpine was announced as its buyer, Encal put out a press release saying it was in talks with an unnamed company about a deal. Web sites for Rio Alto and Calpine Monday said nothing about deal conversations.

Making Sense

While the Rio Alto rumor has less to back it up, it makes sense, at least on paper, for Calpine to secure more of its own natural gas assets. Currently, it buys most of its gas from other producers in the market, where the price of this commodity has soared over the past 12 months as demand for energy has risen faster than supply. Calpine's aggressive expansion plans require huge amounts of natural gas. And as the cost of natural gas has rocketed, it has become increasingly cost effective for Calpine to own its own reserves.

Calpine is estimated to need some 2 billion cubic feet of natural gas per day to run its operations. Rio Alto currently supplies around 480 million cubic feet per day, or nearly a fourth of Calpine's daily requirement. The Calgary-based analyst says that Rio Alto could eventually be sold for 35 Canadian dollars ($22.60), just over 15% above Monday's closing price of C$30.40. Any buyer of Rio Alto would have to factor the company's C$725 million of debt into an enterprise value calculation.

Rio Alto's stock has jumped 25% in March, perhaps as a result of acquisition speculation. The move could also be a relief rally. According to the analyst, Rio's stock price dived in the second half of February amid rumors that it was close to announcing that it had less proven reserves than it had previously thought. Rio didn't return a call seeking comment on its reserves.