This summer, the only thing hotter than the temperature is the oil and gas M&A market. Anadarko Petroleum Corp.'s planned acquisitions of Kerr-McGee Corp. and Western Gas Resources Inc. for $23 billion is only the latest in a line of announcements. The second quarter alone has brought Devon Energy Corp.'s acquisition of Chief Oil & Gas LLC for $2.2 billion; Energy Partners Ltd. and Plains Exploration & Production Co.'s competing bids for Stone Energy Corp. for $2.2 billion and $1.9 billion, respectively; Petrohawk Energy Corp.'s acquisition of KCS Energy Inc. for $1.6 billion; and Apache Corp.'s purchase of Gulf of Mexico shelf properties from BP Plc for $1.3 billion. Others include Chesapeake Energy's purchase of Barnett Shale properties from Four Sevens and Sinclair Oil for $845 million; Pogo Producing Co.'s purchase of Latigo Petroleum Inc. for $750 million; and Range Resources Corp.'s acquisition of Stroud Energy Inc. for $450 million. This frenzied market has been prompted by several factors, but mostly by the "yawning chasm between robust oil and natural gas prices on the futures markets and the rather tepid prices implied in producers' equity valuations," according to John Thieroff, an energy credit analyst for Standard & Poor's. Paying $20 per barrel of oil equivalent seems like a bargain when companies can turn around and hedge oil at $70 and gas at $8 to $9, he says. The current disconnect between spot oil and gas prices is another factor that has led to merger mania in the E&P space, he adds. "Although inventories for both remain relatively strong-especially for natural gas-spot oil prices have stubbornly remained above $70 per barrel in recent weeks, while spot natural gas prices have sagged toward $6 per thousand cubic feet from the low teens early in the year, creating a gap much wider than the implied energy equivalent ratio of 6-to-1," he says. Companies that aren't participating in the merger frenzy are using excess cash flow to buy back stock. Though this is good for investors, it's not enough for Wall Street, Thieroff says. "...There's a growing sense among investors on Wall Street that companies need to pursue larger, higher-impact repurchases to create a better equity story rather than conduct steady, ongoing buyback programs funded with cash flow as available."

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