Will Encore Acquisition Be Bought Out?

There are so many exploration and production companies <!---->in the oil
and natural gas space (most have some mix of both oil and natural gas,
but are heavily weighted towards one or the other), that it is nearly
impossible to keep track of them all unless it was your full time job.
That said, one name that keeps popping on my screen is $4 Billion
market cap Encore Acquisition (EAC),
aka the artist formerly known as $2 Billion market cap Encore
Acquisition.... 3 months ago. As they say, a picture is worth a
thousand words; this is a 100% gain in under 90 days.





Now for the 1000 words ...


Why do I highlight this name at this point since the horse is FAR out of the barn? Well even after this 100% gain, the company believes its assets are undervalued and potentially could be putting itself up for sale. (this news is from late May)

• Onshore oil and natural gas exploration company Encore Acquisition Co (EAC) said on Wednesday it was exploring strategic alternatives, including a possible sale.
• 
  The Fort Worth company, which has acreage in the Bakken, Haynesville
  and Tuscaloosa Marine shale plays, said Lehman Brothers Inc has been
  hired as adviser.
• "It is our belief that Encore's current
  share price is not reflective of our record operating results and our
  ability to efficiently fund these projects through our upstream master
  limited partnership, Encore Energy Partners," Encore Chief Executive
  Jon Brumley said in a statement.

• Encore Acquisition Co (EAC), an oil and gas exploration company which put
  itself up for sale this week, is likely to draw interest from both big
  and small suitors whose coffers are full of cash, thanks to record
  crude prices, analysts said.
• Encore, which owns oil and
  gas properties in the Permian Basin in west Texas, the Haynesville
  shale in northern Louisiana and the U.S. Rockies, said on Wednesday it
  was exploring strategic options because the market is undervaluing its
  shares.
• "A number of exploration and production companies could
  pull off this acquisition," Pavel Molchanov, analyst with Raymond James
  said, noting that Encore's market capitalization is a modest $3
  billion. (note, this article was written in late May, the company has increased another $800 million in valuation since!)
• "Even if oil prices were well below where we are today the acquisition of Encore would be significantly accretive to any purchasers, given that incredible strength in oil and gas prices," he said.
• Companies with complementary oil and gas assets that may be interested in acquiring Encore include Occidental Petroleum Corp (OXY), Noble Energy Inc (NBL) and Anadarko Petroleum Corp (APC),
  Raymond James' Molchanov, said. For example, Occidental has operations
  in the Permian basin and the U.S. Rocky Mountains, while Noble and
  Anadarko both have properties in the Rockies.
• Another energy company that may be interested in some of Encore's assets rather than the entire company is Chesapeake Energy Corp (CHK),
  Phil Weiss, analyst at Argus Research. "If they were to split up the
  assets and the price were reasonable, I could see Chesapeake being
  interested in the Haynesville part," Weiss said.
• The
  announcement surprised some investors because the company's stock is up
  more than 90 percent so far this year, not a typical performance for an
  unvalued stock. Still, some analysts said they see room for upside.
• "With
  Encore's discounted valuation versus its peers and upside to net asset
  value, we believe this announcement will yield continued
  outperformance," investment bank Simmons & Co told clients on
  Thursday.
• And if buyers for Encore do emerge, then the odds of oil-driven deal frenzy go up, David Heikkinen, head of exploration and production research at Tudor, Pickering Holt & Co Securities, said.
• Potential takeover targets include Arena Resources (ARD), Brigham Exploration Co (BEXP), Berry Petroleum Co (BRY), Concho Resources Inc (CXO) and Rex Energy Corp (REXX), Tudor Pickering, said. (a lot of these names have been showing up on my weekly "top performer" lists, especially CXO)

That said, worst case scenario, if you don't
get a buyout, one would be stuck with a company whose estimates
are exploding upward as analysts have completely understated earnings
potential - something I expect to see across the board in this sector.
After Encore's last earnings report, in which they produced a $1.08 vs analysts $0.87,
the full year estimate for 2008 jumped from $4.33 to $5.14. 30 days
earlier it was $3.24. Similar situation in 2009, but again earnings
results for these type of companies are very tied to the pricing of
crude and natural gas; I do expect to see some weakness at least in the
former sometime in the 2nd half of 2008. Oh yes, one more bonus, Encore