Next on Big Oil's Shopping List?

06/22/2010 11:57 am EST


Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ Oil & Gold Monitor, sees big things ahead for three land-based producers of natural gas.

There is a developing technology disparity between oil and gas production, making oil more expensive and gas easier and cheaper. The BP (NYSE: BP) disaster with the Deepwater Horizon rig is illustrative. As the easier to get oil onshore and in shallower water gets scarcer, the technology required to work in deeper water gets more expensive and harder to control. Larger reservoirs are needed to provide longer payoff periods to make the huge investments economical and worth the risks entailed.

On the other hand, onshore gas reserves are becoming more accessible with advances in horizontal drilling techniques. The investment in their recovery is smaller and may be easier to develop with less risk to the environment. Exxon-Mobil’s (NYSE: XOM) acquisition, now nearing completion, of XTO Energy (NYSE: XTO), with major gas reserves, is testimony to this trend. XOM doesn’t shop at the bargain counter; it’s all according to plan.

Several other independent exploration and production companies are likely to be absorbed by Big Oils in similar fashion. While such merger and acquisition activities are necessarily clandestine until announced, street speculation is constant and impacts prices of the stocks. The current high-prospect issues may be reflected in market-makers’ self-protective actions as they facilitate the trading activities of their big fund clients.

Concho Resources (NYSE: CXO), justifies a buy recommendation here with a market-maker forecast that occurs only 1% of the time. When that has happened in the past its sell target (now an upside of 18%) has always been achieved. Its typical 20% gains in less than two month holding periods offer an annual rate prospect of 403%. That ranks it, on an accomplished reward-vs.-risk basis, a better current prospect than 98% of the over 2,000 equity investments we cover.

Arena Resources (NYSE: ARD) ranks better than 96% of our equity securities population. Its 12% risk-balanced prospect of gain in the next three months has a history of earning an average gain of 15% in less than two months some four dozen times in the last four-plus years, or an annual rate of 187%.

Pioneer Natural Resources (NYSE: PXD) also ranks high among forecasts (92%) and likewise brings an

impressive delivery of 11% winners hundreds of times in the same period, at a two-month average holding that racks up an 82% annual rate of gain.

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