M&A Prospects Brighten the Oil Patch

03/01/2010 12:00 pm EST

Focus: COMMODITIES

Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders' Oil & Gold Monitor, sees roadblocks ahead in oil as a commodity, which makes acquisition targets likelier to produce near-term profits.

Nobody should put off filling their gas tank in hopes of $30 [a barrel] crude oil prices or $1.00-a- gallon gasoline bargains. But neither do forecasts (derived from the contract hedging activities of major industry producers and consumers) suggest anything like a return to the runaway prices that financial speculators were able to get other market players to join in the April-July 2008 stampede. The subsequent plunge from $140 to $50 was far too painful for too many to be likely to be repeated.

So, we are left with crude oil price prospects being left at little likely change in the next few months, with, if anything, a tendency to a decline of 5% to 9%. This matters, since energy stock prices are influenced most in the near term by changes in crude oil prices. A prospective flat to down outlook puts a serious damper on energy stock price appreciations.

So, let's look at some stocks that have more merger & acquisition appeal (as targets) than as commodity plays. 

Petrohawk Energy Corp. (NYSE: HK) currently holds the most charm among market makers. They see good odds-on gains of 15% or better with downside exposures of only minus 6% or so as their big fund clients continue to acquire more of the stock. Past prospects, like the present, have seen 15.5% gains reached on average in less than two months. Of course, past results are no guarantee of future gains. (It closed above $21 Friday—Editor.)

Not quite as exciting, but still probably worthwhile, CNX Gas Corp. (NYSE: CXG) offers an outlook of larger upsides (+17%) but with not as good odds and slightly larger exposure potential (-8%). It has previously captured 8 ½% gains in two months 79 times, following forecasts like the present. (It closed above $26 Friday—Editor.)

Of equal attraction, Comstock Resources Inc. (NYSE: CRK) suggests a 14% upside with hazards only half that. It has brought home 11% gains in two months over 60 times. The stock, in three-month periods following forecasts like the present, has spent three-quarters of the time in profit territory, earning it a reward-to-risk ranking better than 95% of the 2,000+ stocks and ETFs we regularly cover. (It closed at around $34.50 Friday—Editor.)

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