3 candidates for the next natural-gas mergers

In the wake of this week's Exxon-XTO deal, these companies are the most likely to be bought out next.

By Louis Navellier Dec 18, 2009 10:51AM

Louis NavellierEarlier this week, corporate giant Exxon Mobil (XOM) said it would buy out natural-gas player XTO Energy (XTO) in a dramatic plan to diversify its energy holdings. Even though Exxon may be one of the largest domestically-traded stocks, this was still a huge move, considering that XTO's market capitalization is more than $20 billion.

 

This deal is sure to cause huge shake-ups in the energy sector. Exxon's move thrusts the U.S. energy giant to the forefront of North America's fast-growing natural-gas industry and could force other energy companies to follow suit in order to remain competitive.

 

So how do you profit from this trend? Well, my advice is not to focus on the big companies that will be doing the purchasing and to try to home in on the startups that are the best prospects for a buyout.

 

Companies always offer a nice premium over existing share prices when snatching up a smaller competitor, and shares gap up as a result. If you can find the next candidate for a natural-gas merger, you will be rewarded richly when one of the big players makes a buyout move.

 

Here are the three natural-gas stocks that I think are the likeliest to be bought out in the wake of the Exxon-XTO deal.

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Candidate 1: Southwestern Energy (SWN)

 

Like all natural-gas companies, Southwestern Energy (SWN) has been challenged by massive supply and low prices in 2009. However, the company has responded by pushing production through the roof. In the latest quarter, output soared by 65%. That means even though the company is getting a lower price, it is still posting great sales. The reason for this dramatic production is that SWN is a pioneer in horizontal drilling -- meaning instead of erecting many rigs that drill down into a gas field, it simply taps a well once and then drills sideways to access the remainder of the field. This technology keeps costs down while boosting output. This technology makes Southwestern a great addition for any larger energy company. And even if gas prices stay very soft, this horizontal drilling tactic will allow Southwestern to increase sales simply by bringing even more natural gas to the market, so this stock is a good buy.

 

Candidate 2: Interoil Corporation (IOC)

 

Interoil (IOC) is focused on developing an integrated energy business in Papua New Guinea and the surrounding region. In addition to operating a 32,500-barrel-per-day refinery and retail assets, Interoil has begun an extensive natural-gas exploration program on its 8-million-acre site in the area and has been hitting profitable pockets of the fuel with nearly every test well. IOC beat third-quarter earnings estimates despite big exploration expenses in the quarter, and the deeper pockets of a bigger energy company could really capitalize on the profitable gas fields that are already under Interoil's stewardship.

 

Candidate 3: Ultrapar Participacoes (UGP)

 

Ultrapar Participacoes (UGP) is a key energy company in Latin America. Ultrapar and its subsidiaries distribute liquefied petroleum gas, refine and sell petroleum products and produce chemicals.


In its latest earnings report, UGP showed significant strides thanks to the successful integration of the operations from its own buyout of operations from Texaco and Ipiranga. This drove up net earnings 9% year over year and 43% over the previous quarter, which resulted in an upgrade of the company's credit rating by Standard & Poor's.


With a market capitalization of only about $6 billion and an impressive footprint in Latin America, this company would be a great addition to any energy company looking to focus on the opportunities in natural gas.

 

At the time of this writing, Louis Navellier owned shares of XTO, XOM, SWN, IOC and UGP in personal or client portfolios.

 

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