Natural Gas Bulls Get Restless

By Eric Fox | November 15, 2010 AAA

A series of buyouts and proposed privatization deals in the energy sector indicate that some players in the business feel that natural gas assets have significant long-term value, despite the current bearish investor and industry view towards these properties.

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Deal R Us
In mid-October, 2010, Quicksilver Resources (NYSE:KWK) received a letter from Quicksilver Energy, L.P., expressing interest in possibly taking the company private at a "substantial premium to the current market price". Quicksilver Energy and Pennsylvania Management, LLC are entities associated with the Darden Family, which owns large amounts of Quicksilver Resources. The letter also indicated that another large shareholder was interested in the deal, as well.

Quicksilver Energy, L.P did not give any indication of what price it was willing to pay for the company, but the stock jumped on the news. Even with the pop, Quicksilver Resources trades far below the price at the peak of the energy bull market in 2008, when it traded above $42 per share.

Next up was EXCO Resources (NYSE:XCO), a major player in the Haynesville Shale. Douglas H. Miller, the CEO of EXCO, offered to buy all the outstanding shares of the company at a price of $20.50 per share. This was a 38% premium to the market price before the deal. The offer letter also indicated that several other large players in the energy sector would participate in the deal. As with Quicksilver Resources, even with the healthy premium, the buy out price is about 66% of what EXCO traded at back in 2008.

The latest deal for natural gas assets came with Chevron Corporation (NYSE:CVX) agreeing to buy Atlas Energy (Nasdaq:ATLS) in a transaction worth $4.3 billion. Atlas Energy has substantial assets in the Appalachian Basin, including hundreds of thousands of acres prospective for the Marcellus Shale.

The Reasoning
The apparent justification for these possible deals is a realization that the stock market is too focused on the short-term fundamentals of the natural gas markets, and is undervaluing these assets. Once drilling slows down in the various natural gas shale plays, and/or demand returns with economic growth, the fundamentals will strengthen as supply and demand come into balance.

Other Options
Other possible candidates for buyouts include any exploration and production companies that share the common characteristics of a depressed stock price, an orientation towards natural gas, significant insider share ownership or with large blocks of stock controlled by institutional investors.

These include Range Resources (NYSE:RRC), which has a huge acreage position in Appalachia that is prospective for the Marcellus Shale, and Ultra Petroleum (NYSE:UPL), which is growing rapidly from its core properties in the Pinedale Field while building up another core area in the Marcellus Shale.

The Bottom Line
Natural gas properties still have long-term value to some investors in the Energy sector. This is demonstrated by recent merger activity and several proposals by large shareholders to take exploration and production companies private. (For more, see Understanding Oil Industry Terminology.)

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