Will History Repeat Itself?

By Eric Fox | February 22, 2010 AAA

A recent announcement of a prominent company buying energy assets may raise a comparison to previous cycles where players outside the industry made large purchases of oil and gas companies at the peak of the cycle.

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GE Makes Two Oil And Gas Property Acquisitions
General Electric
(NYSE: GE) announced two acquisitions of oil and natural gas properties in North America. The company paid $65 million to a private company for properties in Texas, and $137 million to buy acreage in North Dakota from St. Mary Land & Exploration (NYSE: SM). GE is partnering with two smaller oil and gas companies to manage these properties.
The North Dakota properties are in McKenzie County, and they may be prospective for the Bakken Shale or the Sanish Three Forks formation, although GE didn't release any data on reserves or production on its new assets.

Other McKenzie County Players
Continental Resources
(NYSE: CLR) has been active in McKenzie County, and in the company's Q4 2009 it reported two well completions here. The Hendrickson 1-36H and Simmental 1-21H well produced an average of 1,990 and 1,271 barrels of oil equivalent, respectively, during the first seven days.

Kodiak Oil & Gas (NYSE: KOG) is also developing acreage here, and it has allocated $5 million to drill three gross wells in 2010 to test its potential.

Early 1980s Deja Vu
Some investors may find it a little disturbing when entities from outside the industry step in and buy assets, as this may be seen as a psychological sign of a peak in asset prices. During the last energy super cycle in the early 1980s, DuPont (NYSE: DD) purchased Conoco as a hedge against rising and volatile prices for its feedstock for chemicals. DuPont later got rid of Conoco in the late 1990s through a spinoff and sale. Conoco later merged with Phillips Petroleum to form Conoco-Phillips (NYSE: COP).

Another large deal at that time was U.S. Steel (NYSE: X) buying Marathon Oil (NYSE: MRO) for $6.3 billion. It might be a stretch to compare the small purchase by GE to these two deals, but this could just be the beginning of what Peter Lynch, the famed manager of the Fidelity Fund, called "diworsification", a process where companies buy businesses that are not complementary to current operations.

These purchases also coincided with a peak in oil prices when the media was full of scare stories about the soaring and permanently higher prices for oil, the difficulty in finding new reserves and the shift in world dominance away from consumers to oil producers. Sound familiar?

Watch For Signs Of A Peak
Understanding the psychology of an investing climate is an important part of the stock selection process, although one that is hard to analyze empirically. Nevertheless, investors should always pay attention to signs that may indicate a peak is near. (Learn about peak oil; read Peak Oil: What To Do When The Wells Run Dry.)

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