In a move that clearly raises its U.S. natural gas profile significantly, Marathon Oil Co. plans to buy Pennaco Energy Inc., Denver, for $19 per share, or approximately $500 million in cash, including $54 million of net debt. The USX-Marathon Group division's move is another case of an opportunity-rich producer being snapped up by a larger company with deep financial pockets, market observers say. "Higher commodity prices certainly have strengthened balance sheets," says David L. Bole, vice president, corporate research and development, Randall & Dewey Inc. in Houston. "Many companies, finding drillbit opportunities insufficient, are looking at acquisitions, either by repurchasing their own stock or buying other companies, as alternatives." Founded in 1998, Pennaco's entire production is coalbed methane (CBM) gas from the Powder River Basin in northern Wyoming and southern Montana. One of the area's largest leaseholders, it has a net position of more than 400,000 acres and approximately 200 billion cubic feet of net proven reserves, with more than 800 Bcf of potential upside. (For more on Pennaco, see "A New Power in the Powder," March 2000, Oil and Gas Investor.) Marathon estimates ultimate acquisition and development costs of the proven and probable reserves will be around $4.50 per barrel of oil equivalent. "The North American gas market is a core area for Marathon," says Clarence Cazalot, Marathon president, "and this acquisition will enhance our already strong presence. Its assets will provide a significant new reserve base that we can develop and deliver quickly to the marketplace." Bob Christensen, analyst with First Albany Corp. 's FAC/Equities division, says Marathon's venture in the Powder River Basin is good for the area's producers, such as Denver-based Barrett Resources. The purchase price implies a $1,380-per-acre value on Powder River CBM acreage. Meanwhile, Barrett's CBM acreage is much better positioned and potentially more prolific, worth $40 to $50 a share, he adds. His target on Barrett's common shares is $109. "We contend that herd psychology, legendary in the oil patch, will trigger interest from other domestic oils for the other few Powder River CBM players like Barrett." At least four large domestic producers- Phillips, Conoco, Unocal and Occidental Petroleum-are short on North American natural gas positions. "A takeover bid for a Powder River CBM operator might make all the difference to these oil companies' future earnings and cash flows given the surprisingly strong environment that has developed for North American natural gas in the past year," Christensen says. At press time, shares of Pennaco were trading higher than Marathon's offer of $19 each, suggesting shareholders may hold out on tendering their shares. Christensen says another buyer may emerge, leaving Marathon seeking to buy another operator to gain access to this play. The deal carries a $15-million breakup fee, and may be terminated by either company if not consummated by April 30. Chris Stavros, E&P analyst for UBS Warburg, says Marathon's news is in keeping with its strategy to grow and improve its upstream business. Steve Lowden, Marathon senior vice president of business development, told analysts this fall that he saw niche opportunities for Marathon to leverage its size by combining the technical competence of a supermajor with the agility of an independent. "We believe this situation is somewhat analogous," Stavros says, "with Marathon functioning as the major and Pennaco acting as the small independent with expertise in CBM gas extraction and marketing." Lehman Brothers Inc. advised Pennaco in the transaction.