The Rude Awakening
Wall Street, New York
Friday, January 6, 2006

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Eric Fry, reporting from Rancho Santana, Nicaragua…

Ethan makes lists…lots of lists. Your editor's 7-year old
son sometimes creates lists that produce very big smiles -
and moist eyes - on his father's face. Two weeks ago, Ethan
created a list entitled, "Things I Like to Do."

This comprehensive 8-page opus included every sort of
"like" imaginable - from the impish "say hi to people on
the street in a weird way," to the Rockwellian "playing in
the backyard" or "playing with Daddy," to the traditional
"have an action-figure war" or "wrestle with my brother,"
to the less traditional "video-tape action scenes from
James Bond" or "create story books."

Your editor can proudly attest that creating story books is
Ethan's absolute favorite "like." He often spends hours a
day writing and illustrating (mostly illustrating) his
original titles like, "Babies Finding Candy" or "Cracked"
or his current effort, "The Tropical Trip."

To begin developing the storyline of his newest work, he
drafted - what else - a list. He drafted a list of "Things
I Want to See in Nicaragua." Surprisingly, he's seen almost
every item on the list: a parrot a scorpion, a seal, a
rainbow, a blue-tailed gecko…and even a monkey. He has
not yet seen the "tranchila" he thinks he wants to
encounter in the wild. Nor, for that matter, has he seen a
sea turtle or an electric eel.

However, as Ethan mentioned yesterday, he has seen some
things here in Nicaragua that he never thought to include
on his list. "I've seen a starving horse," he said, "and a
starving cow and a starving dog…and a starving person.
I've never seen anyone so poor before."

"That's one reason I pulled you out of school for a week to
bring you here…so that you could see all of this for
yourself," his father replied. "The beaches are beautiful,
but the locals are poor…That's my 'show and tell' for the
week."

Matt Badiali, the editor of the S&A Oil Report, has also
been making a list.

In last Friday's Rude Awakening, he presented a short list
of independent oil and gas companies that are likely to
catch the fancy of a corporate suitor. Today, Matt
concludes his analysis by presenting an even shorter list:
the three independent oil companies most likely to attract
a takeover bid from a major oil company. Details below…

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Bagging Texas Tea, Part II
By Matt Badiali

Last week, I cited Anadarko, Devon and Occidental as
potential takeover candidates. Allow me to provide a bit
more detail.

Anadarko Petroleum (NYSE: APC) is coming out of a period of
restructuring. It has a new focus on long-lived resources
and growth areas. I see this as both a benefit to
shareholders and a big, fat lure to asset-hungry oil
majors.

Anadarko's long-term strategy focuses on "unconventional"
oil and gas reserves in well-known, mature basins.
"Unconventional" refers to reserves like tight gas and coal
bed methane, as well as those reserves that require some
sort of enhanced recovery process. The U.S. Geological
Survey has identified over 1,000 trillion cubic feet of
these unconventional gas-equivalent reserves still
remaining in North America.

The second part of Anadarko's new strategy is to pursue
growth through its expertise in both onshore and offshore
exploration. The company's research division leads the
industry in seismic imaging. Thanks largely to its
exploration successes, Anadarko owns interests in 7 of 9
major discoveries in the Gulf of Mexico, which gross more
than 1 trillion cubic feet of natural gas. The latest
discoveries include Mondo NW, Atlas NW, Atlas, Vortex,
Jubilee, Cheyenne, and the K2 complex. Anadarko also holds
large exploration leases in the deepwater Gulf of Mexico,
North Africa, and the Middle East.

The company's largest prospect is the K2 complex. Anadarko
estimates the field contains between 1 and 2 billion
barrels of oil. However, last year's hurricanes delayed
development work by damaging moorings on the two drill
ships working in the field.

As of October 2005, the company had 68 drilling rigs
operating. During the third-quarter alone, Anadarko drilled
241 wells with a 99% success rate. That works out to only 2
dry holes, which is a tremendous credit to the company's
geological expertise.

Since Anadarko's proven reserves would increase the
reserves of the average major oil company by nearly 20%,
the company should be a compelling target for every one of
the Majors. And Anadarko's assets will become even more
valuable to a Major as the industry's cost of finding and
replacing reserves steadily increases.

Anadarko's undeveloped regions are primarily in Canada,
Alaska, and the lower 48 states. The company holds over 7
million undeveloped acres in prime oil and gas regions. All
production and proven reserves aside, these land holdings
alone make Anadarko an extremely attractive takeover
prospect.

In 2004, the company sold properties that didn't fit with
its new strategy. It used the proceeds to pay down $1.2
billion in long-term debt and buy back $1.3 billion in
common stock. Now that Anadarko has both its exploration
and financial houses in order, it is ripe for the picking.
The stock currently trades around $105 per share, but
Wulff's McDep Associates estimates Anadarko's net present
value to be $140 per share.

At $105 per share, an investor would be buying Anadarko's
proven reserves for about $10.30 per BOE, and 47% of those
reserves are oil. I think an investor could comfortably buy
Anadarko up to $140 per share, which is less than $15 per
BOE.

Next up…Devon Energy (NYSE: DVN), one of the best values in
oil and gas independents. Its strategy is to focus on low-
risk exploration, while investing in select high-impact
projects for future growth.

Devon uses acquisitions to fuel its growth - it acquired
five companies from 1998 to 2003. Its last acquisition,
Ocean Energy, made Devon the largest U.S. independent oil
and gas producer. Devon is very active in North American
fields, as well as the largest U.S.-based independent
producer in Canada. Among all the independents, it is the
largest gas producer in Texas, the 2nd largest gas producer
in Montana, 2nd largest gas producer in New Mexico, the 3rd
largest gas producer in Wyoming, and the largest oil
producer in New Mexico.

Devon's current exploration inventory includes some very
attractive offshore acreage. The offshore locations include
56 prospects in the Gulf of Mexico, 21 prospects in the
offshore area of Brazil, including the Campos basin, and 20
prospects offshore of West Africa. In addition to those
ready-to-drill prospects, Devon has large blocks of
unexplored acreage in the most desirable offshore basins.
It holds over 1.3 million acres of prime, undeveloped deep-
water Gulf of Mexico leases, along with 800,000 undeveloped
acres in offshore Brazil.

Devon also holds another 5.4 million undeveloped acres off
the shore of Western Africa, a region of growing interest
to the oil majors. China National Offshore Oil Corporation
(CNOOC) just paid $2.27 billion for a 45% stake in the AKPO
field, offshore in Nigeria, Western Africa.

I'm surprised this company is still on the table at all.
Devon would be an excellent fit for almost any the major
oil companies. Devon's proven reserves represent
approximately 18% of the average Major's reserves, and 40%
of them are oil.

At $68 per share, the stock market values Devon's reserves
at $13 per BOE. But given the company's substantial
holdings of exploration properties, I believe Devon could
be worth as much as $86 a share to a Major. So I've advised
the subscribers of my S&A Oil Report to pay up to $70 per
share for DVN, which would represent a price of $13.50 per
BOE. That should leave plenty of upside if Devon gets
bought out.

Occidental Petroleum (NYSE: OXY) is my third most likely
buyout candidate. It has a larger international presence
than either Anadarko or Devon, which could make it more
attractive to a company like Royal Dutch Shell or British
Petroleum.

"Oxy" holds significant undeveloped reserves in Latin
America (5.3 million acres), the Middle East (1.4 million
acres), Russia and Asia (6.9 million acres). The company
also has a legacy position in Libya, which has over 32
million acres of oil rich prospects. Occidental also has
tremendous U.S. assets, including a strong position in the
Permian Basin and a former strategic naval petroleum
reserve in California. All of these assets provide
Occidental - or an acquirer - with significant room to
grow.

One of Occidentals strengths is its ability to find oil and
gas cheaply. Over the last three years, the company's
average finding cost was $5 per barrel. That was
significantly lower than Exxon's ($6), Anadarko's ($8.50),
or Kerr-McGee's ($17).

In addition, Occidental Petroleum made a very savvy
takeover bid for Vintage Petroleum. Oxy paid $3.5 billion
for 437 million barrels of reserves, which equaled $8 per
barrel. We won't see companies selling that cheaply in
today's market. As part of the Vintage deal, Occidental
bought back 9 million shares of common stock.

If Occidental gets bought out, I could imagine the shares
commanding a very nice premium to their current price.
Oxy's shares currently trade for $91. Kurt Wulff's McDep
Associates set the present value of Occidental Shares at
$120, a 31% premium over present-day prices.

I am confident that Occidental's acreage and probable
reserves will command the highest per proven reserve price
of the three companies listed I've discussed. However, I
don't think that I'd advise individual investors to pay
much more than $15.50 per barrel of proved reserves, which
would be about $96 per share.
 
It will be very interesting to see which of these three
independent oil companies are still independent one year
from now!

[Joel's Note: There is a move underway in the oil industry
that nobody is talking about - a move that could secure
tremendous profits for savvy investors. Matt Badiali has
been keeping an eye on developments and has rushed out a
special Oil Report detailing his findings. Read on below
and discover how you can take advantage of this black gold
opportunity:

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[Joel's Note: Is there something you would like to see
covered by your Rude editors? Do you have questions,
queries or bothers with past issues? Write in and let us
know at aussiejoel@the-rude-awakening.com and catch up with
all your Rude reading on the www.the-rude-awakening.com

I've got about 10 minutes to get to the Managua
International Airport, so that's it for today. By the time
you read this I should be somewhere over Cuba, en route to
Miami. Catch you when I get back.

Cheers,

Joel