Shell Bids $55 a Share for Barrett, but May Be Rebuffed

In an attempt to secure a bigger piece of the lucrative U.S. natural gas market, Shell Oil, a subsidiary of Royal Dutch Shell, announced today an offer to acquire Barrett Resources (BRR Quote - Cramer on BRR - Stock Picks) for about $1.8 billion.

Shell is offering $55 in cash for each share of Barrett, a land-based natural gas exploration and production company with properties in the Rocky Mountain and mid-continent regions. The offer, made public today, was originally made in a March 1 letter to Barrett Chairman and CEO Peter Dea and represented a 24% premium over Barrett's closing price of $44.25 on Feb. 28. While Barrett told Shell it would consider the proposal at its regularly scheduled board meeting today and Thursday, the company appears poised to reject Shell's offer as inadequate.

Shell says it hopes Barrett's board will respond positively to the offer. However, Shell is ready to submit the offer directly to shareholders if the board doesn't endorse the bid. "We are standing by and are ready to negotiate a merger agreement promptly so that Barrett's shareholders can consider our $55.00 per share cash offer," said Walter van de Vijver, president and CEO of Shell's exploration and production subsidiary in a statement. "However, absent a positive response from Barrett's board, Shell intends to commence a fully funded, all cash tender offer for all outstanding Barrett shares."

Barrett's shares jumped well above the $55 offer on the news, suggesting investors think Shell's offer could be sweetened or a competing offer may be in the wings. In recent trading, Barrett was up $14.88, or 33%, at $60.50.

The news pushed other natural gas stocks higher, with the AMEX Natural Gas Index, or XNG, up nearly 5%. Investors are looking at natural gas companies like EOG Resources (EOG Quote - Cramer on EOG - Stock Picks), Burlington Resources (BR Quote - Cramer on BR - Stock Picks) and Mitchell Energy & Development (MND Quote - Cramer on MND - Stock Picks) as possible players if this represents an acceleration in the combinations game.

"Investors will scramble to try to determine who's next," says Jim Wicklund, director of energy research at Dain Rauscher Wessels. "It improves the visibility of the natural gas companies and increases speculation about possible combinations. That is something nobody was thinking about two weeks ago."

Shell's interest in Barrett only reinforces the fact that energy companies will increase their focus on natural gas as new power generation and demand for cleaner fuels grows. "The acquisition of Barrett will give Shell an immediate material presence in the Rocky Mountain region, the second largest natural gas basin in the U.S.," said Shell's van de Vijver. "This transaction will enhance Shell's natural gas position with tangible growth opportunities outside our existing core areas."

And, it potentially speaks volumes about the future strength of natural gas. "For Shell to make an offer like this is a clear confirmation about the continued strength of natural gas," says Dain Rauscher's Wicklund.