Options traders were buying up Houston-based Southwestern Energy Co. (NYSE: SWN) calls by the bushel in early June, leading to strong speculation that the company is being positioned for a takeover -- with Chevron the lead name on the dance card.

What do the bulls know that the oil and gas industry doesn't? Here's a look at why Southwestern may be primed for a takeover.

First, what's up with the options bulls? Southwestern Energy calls outpaced put contracts by a 10-1 margin, at 26,496 to 2,773 on June 3, according to the tracking firm OptionsMonster, thus yielding an 0.10 put/call ratio. Southwestern Energy’s June 45 calls saw the most trading volume, accounting for approximately 50% of all trading activity for the session.

That's fairly volatile, even for the options market. By and large, traders use the put/call ratio to calculate investor sentiment on a given company's stock. A high put/call ratio -- the opposite of what we're seeing in early June, means investors are bearish on a company. Conversely, a high put/call ratio -- like Southwestern Energy's on June 3 -- means traders are bullish on a stock.

But were options traders wrong? Or just way ahead of the rest of the field? The following trading week saw Southwestern Energy’s stock fall from $44 per-share to $42.

That in itself is slightly off-kilter, considering that natural gas -- Southwestern's wheelhouse -- has risen 30% since late April. Upticks in commodity prices almost always send an oil and gas company's stock upward, but that hasn’t been happening for Southwestern Energy this month (although the company’s stock price did rise from $38 to $44 from April to May.)

Okay, so Southwestern was bumping along with the rest of the stock market, which has been repeatedly battered by toxic economic data during the first two weeks of June. But then CNBC came out with a report on June 6 indicating that Southwestern was the target of a takeover bid, naming Chevron (Stock Quote: CVX) as one of the "potential buyers" for Southwestern Energy.

The author of the CNBC report (and co-founder of OptionsMonster.com) -- Jon Najarian -- likely noticed the same options trading activity that led to this article. Says Najarian:

More than 26,000 calls changed hands versus less than 2,800 puts, according to OptionMonster's tracking systems. The June 45 calls accounted for almost half the activity, trading for $0.23 early, but closed the session at $0.57 as SWN pushed higher.

Hedge fund traders cited Chevron as a potential buyer for the natural-gas company. Southwestern is valued at about $15 billion--not small potatoes but also very doable for a giant such as CVX, which has that much cash on its balance sheet right now.

At 28,800 contracts for the day, Southwestern's trading activity was eight times higher than normal trading averages, Najarian added; further fueling the rumor that Southwestern was about to boarded.

Here is some additional interesting trading activity on Southwestern Energy on June 3.

  • Stock trading volume for the day on Southwestern was way up, at 7,704,907 versus the company's daily trading average of 5,130,020 shares.
  • Southwestern traded higher than its 50-day moving average, and higher than its 200-day moving average.
  • The stock’s closing price was about 9.0% away from its one-year target price of $46.93.

Correspondingly, Chevron's stock trading was muted on June 3, down 0.1% for the day. But analysts said the stock was in slight decline due to a storage tank accident at Chevron's Pembroke refinery in Wales, which killed four people and injured another worker.

Najarian and other reporters following Southwestern weren’t too specific on who indicated that a big oil company might be interested in a takeover, only going as far to say that some "hedge fund managers" were talking up the buyout bid.

Sources also say that Chevron is in the market for a pure natural gas company, and Southwestern Energy, even though it’s valued at about $15 billion, would fit the bill.

Buyout or not, analysts have been swooning over Southwestern all year. A good case in point: Analyst David Alton Clark, writing on the financial web site Seeking Alpha back on February 24, says it's only a matter of time before Southwestern Energy "pops." He lists five reasons why (and they're all worth reading) but his most convincing case derives from his belief that the company is seriously undervalued:

Southwestern Energy is hugely undervalued, perhaps by greater than two times the current market value based on the recent price paid by BHP Billiton for Chesapeake Energy’s Fayetteville assets. If you add up and include SWN’s assets (proven reserves and implied value of undeveloped lease holds), the stock price should be in the range of $80 per share. SWN is currently trading at $38. You do the math. Can you say major discount? Additionally, based on current and past JVs and take-outs, the prices for these assets seem to be rapidly rising, not falling. It is a seller’s market, as they say in the real estate business.

Consequently, whether you buy into the Southwestern/Chevron rumors, or if you agree with analysts like Clark who say that Southwestern Energy is on a high upward path, the company's stock is worth a second, and maybe even a third look.

Apparently, a lot of smart hedge fund managers and options traders are looking already.