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5 stocks fired up by energy mergers
ConocoPhillips is paying $35 billion to build its natural gas stake. Here are five other stocks likely to benefit from continued consolidation in the gas fields.
By Jim Jubak
An already hot market for natural gas stocks got a lot hotter this week -- and I don't think it's going to cool down any time soon. Yes, the stocks are up big. But three powerful trends will push them higher in the first few months of 2006.
I've been pounding away at these three trends separately in my recent weekly appearances on CNBC's "Morning Call." ConocoPhillips' (COP, news, msgs) $35 billion bid for Burlington Resources (BR, news, msgs) shows that even a stock like Burlington that's up 25% in the last month can look like a bargain when you put all three trends together.
Last week, you might remember, I told viewers on CNBC and readers on CNBC.com on MSN Money about one of those trends: That, suddenly, the continental United States is the hot spot for natural gas exploration and production. Giants such as Exxon Mobil (XOM, news, msgs) and independents such as Forest Oil (FST, news, msgs) have decided to reallocate their exploration drilling dollars from overseas projects to the onshore market in the United States.
Most of Burlington's gas reserves are located in the Rocky Mountain gas zone that stretches through the United States and Canada. The purchase will increase ConocoPhillips' gas reserves by 50% and turn the company into the top North American gas producer. ConocoPhillips paid a 20% premium for Burlington Resources -- and a high-end price of almost $3 per thousand cubic feet of natural gas reserves. It was willing to do so because, ConocoPhillips CEO James Mulva said, Burlington Resources' low-risk North American gas reserves will balance the higher political risks of ConocoPhillips' projects in Venezuela and Russia.
At the end of September I told viewers and readers about a second trend: High energy prices have made it economical to produce the natural gas trapped in tough-to-drill rock formations in the United States, what the industry calls unconventional deposits. These deposits -- discovered long ago but bypassed because getting at the gas was too expensive -- are, suddenly, the hot place to drill in the United States.
Burlington Resources, no surprise, owns a big hunk of one of these unconventional deposits, the Barnett Shale formation of north-central Texas.
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Let's talk about the weather
Cold weather, the third trend I flagged for you in my Nov. 9 spot on "Morning Call," returned just in time -- it's 17 degrees in New York as I write this -- to put even more heat under the price of natural gas and the price of natural gas stocks. During what's called the shoulder period, energy inventories build up if producers and refiners run at full speed to get a head start on winter demand but winter weather itself is slow to arrive. That's exactly what happened this year as mild weather gripped the country for much of November. But normal cold temperatures are back and so are big drawdowns of inventory. Next week's drawdown of natural gas inventories has a good chance to break records. Natural gas futures for January delivery ran to a record $15.38 per million BTUs on Dec. 13 and a big drawndown in the next few weeks could push natural gas futures toward $20 per million BTUs. Huge spikes like that in the futures market usually drive the prices of natural gas stocks higher.
With both the short-term (natural gas prices) and long-term (the boom in North American and unconventional gas reserves) hard at work, the ConocoPhillips bid for Burlington Resources is certainly not the end of acquisitions in this sector.
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