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Why Frontier Oil May Get Pumped Up

If you think oil is the market's sweet spot, Big Board-listed Frontier Oil (FTO) could be quite a play. So argue some pros who say that the Houston-based crude-oil refiner and wholesale marketer is not only an energy play but also a buyout bet--in light of Phillips Petroleum's recent decision to acquire Tosco, another refiner. The Tosco buy makes Frontier the fifth-largest independent refiner and perhaps the next takeover target, says these pros, mainly because of its assets and the stock's low valuation. Frontier would fit well with the likes of Conoco or Ultramar Diamond Shamrock, they argue.

Trading at 7 1/2, the stock has a price-earnings ratio of just 4.6. And based on cash flow, it has a multiple of 3. If Frontier were priced at Tosco's buyout level, it would be worth 16 to 18--based on earnings and cash flow, says one investment banker familiar with the Phillips-Tosco deal.

Fueling buyout whispers is a rumor that Frontier has canceled its stock-repurchase plan. The company bought back 1.3 million shares, or 3% of outstanding stock, in 2000 and was scheduled to buy more. Some say the buybacks stopped because Frontier got a takeover offer.

Frontier has been buying its own shares because it considers its assets the cheapest available. Oil maven Fred Leuffer of Bear Stearns says the stock is attractively priced, based on earnings and cash flow. He estimates 2001 earnings at $1.60 a share and cash flow at $2.40 a share. Frontier declined comment. By Gene G. Marcial

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