Consolidation in the oil patch will heat up, says Fadel Gheit of Oppenheimer (OPY ). And Pioneer Natural Resources (PXD ) (PXD), an independent $5.1 billion oil-and-gas outfit, is one of the most attractive targets, he says. Gheit argues that Pioneer's recent sale of $1.6 billion in assets will let it focus on exploring for natural gas in North America. That would play into the strategy of XTO Energy (XTO ), a $16 billion producer and an eager buyer of onshore gas in the U.S. Gheit expects XTO to go after Pioneer because of its reserves and its strong cash flow -- plus its $1.6 billion hoard from selling assets in the Gulf of Mexico and Argentina. Pioneer, down from 56 in September to 43 now, is worth 60 a share based on its assets, says Gheit. Pioneer's 866 million barrels of proven reserves are valued at just $11 a barrel vs. peers' $15.50, he figures. Pioneer is "the most under-valued stock in our universe," adds Gheit. If XTO were to buy Pioneer, it would become one of the top independents, with proven reserves of 2.1 billion barrels and a market cap of $25 billion. Prudential Equities, "neutral" on Pioneer, nevertheless sees the stock at 53 in a year, based on strong demand for gas and falling production. Pioneer declined comment. XTO did not return calls.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial