Conoco Puts Match to M&A Tinder

With the management change at EnCana -- where CEO Gwyn Morgan is stepping down at year-end -- there will be plenty of chatter about the Calgary company's future. Furthermore, Conoco's marriage to Burlington puts the focus squarely on North American natural gas, an EnCana stronghold.

But the list doesn't end there. Other large independent gas producers include companies like Anadarko Petroleum (APC), Chesapeake Energy (CHK), Devon Energy (DVN), EOG Resources (EOG) and XTO Energy (XTO), to name a few. Plus, add to that, fast-growing and prospective newcomers like Southwestern Energy (SWN) and Ultra Petroleum (UPL), and you have quite a start to a shopping list.

Will they all team up with majors? Of course not. And in most cases -- as I have argued for years in these pages -- it is rarely prudent to play stocks based on takeover speculation. While that counsel remains true, this trend is unique. The major integrated oil companies have a pile of cash, and they are feeling the pressure to spend it. As the trend becomes more clear, it is very likely that natural gas-focused, independent exploration and production companies will find solid investor support as we enter the new year.

Unconventional

Not only is investing on takeover talk unconventional, so too are many of these investments. Unconventional exploration, known as "tight-gas" plays, that is. Take, Chesapeake's recent acquisition in the Appalachian Basin or Southwestern's stranglehold in the Fayetteville Shale in Arkansas or the numerous companies working in the red-hot Fort Worth basin, home of the Barnett Shale.

It's only in the past two years that tight-gas plays have hit the radar screens of the average investor, and there is still plenty of room for growth. What most of these large independents have in common is their massive acreage holdings in non-traditional gas plays. And, with plenty of money to spend and the opportunities to turn these shale plays into gas "manufacturing" plays (once the pattern is established or the shale "code" is broken, the process is largely repetitive), the majors that are looking for predictable, low-risk growth will come calling. Willing buyers and willing sellers should lead to plenty of transactions in the coming months.

The one risk is commodity prices. With natural gas prices at $15 per mmbtu, just about anything looks attractive. But take the gas price back to the $6-$7 range, and the deal flow will definitely slow down.

For now, however, when the doorbell rings at the house of a large independent E&P executive, it isn't likely Avon calling. It's more likely Shell, Exxon or Chevron (CVX), looking to strike a deal.

As 2006 begins, the E&P merger train is leaving the station.

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