Calpine Makes Sense as Bidder for Canada's Encal

Is it Calpine (CPN Quote - Cramer on CPN - Stock Picks) that is in talks to buy Encal Energy (ECA Quote - Cramer on ECA - Stock Picks), the Canadian oil and gas exploration and production company that said Friday it's in merger discussions?

Calgary-based Encal said in a statement that it's talking about a combination with another firm, but didn't name the other party. San Jose, Calif.-based Calpine is keen to obtain its own gas fields to protect itself against the soaring price of natural gas. In October, the company bought Calgary-based TriGas Exploration for around $100 million. Rumors of a Calpine buy of Encal are ricocheting around Calgary's close-knit brokerage community.

Encal's Friday statement reads: "In response to unusual trading activity in the common shares of Encal Energy Ltd., Encal advises that it is in preliminary discussions with a party regarding a possible combination. The company routinely evaluates all of its alternatives on a continuing basis. No assurance can be given that an agreement within respect to any transaction will be reached or that a transaction will be consummated."

Neither Calpine nor Encal returned calls seeking comment.

Encal's stock soared 10% to $8, while Calpine's was ahead 5.67% to $40.81.

At $8.70 to $9 per share, the rumored price range, Encal's market value would be around $1 billion. Add in debt of $180 million, and the potential buyer could be paying $1.18 billion. That would price the deal at around $50,000 per barrel of oil equivalent (BOE/D) per day, according to a Calgary-based oil and gas stock analyst who requested anonymity. The analyst said the $50,000 BOE/D handle makes the deal relatively pricey.

Still, Calpine, if it is the suitor, needs all the competitively priced gas it can get its hands on as it tries to secure the fuel it needs to run its fast-expanding generating empire. Owning actual gas fields is significantly cheaper than buying gas using long-term contracts. The analyst calculates that Calpine needs 2 billion cubic feet of natural gas per day to run its operations. Encal can currently supply 210 million of natural gas per day, or some 10% of Calpine's overall needs, says the analyst.

An alleged weakness in Calpine's strategy is its almost total dependence on natural gas. Of course, the company can pass on the higher costs of the fuel to buyers of its electricity. But, as the California energy crisis illustrates, politicians are starting to balk at making companies and voters in their constituencies pay higher electricity rates.

Another potential risk is that Calpine, as an electricity generator, doesn't have much experience in gas production and exploration.

Detox took a skeptical look at Calpine's aggressive buildout plans last November.