Bakken deal a tossup between strong market, easy money

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

Global markets are rallying, having been given a boost by a surprisingly strong earnings report from Citigroup. Overseas, Shanghai stock exchange is near a one month high, joining the market surge around the globe.

Part of the rally may be the proliferation of deals—Shire upping the bid for ABBV, Lindt's tie-up with Russell Stover, Whiting Petroleum buying Kodiak Oil & Gas, and Mylan buying assets from Abbot for over $5 billion.

The most interesting deal is Whiting offering to buy Kodiak in an all stock-transaction worth $3.8 billion, plus the assumption of $2.2 billion in debt. The marriage creates a new top producer in North Dakota's massive Bakken shale formation.

As a combined entity, the companies will be able to drill faster and operate more efficiently, mainly because they will be the largest producer in the Bakken. Watch other peers today like Oasis Petroleum and perhaps Continental Resources.

But Continental is likely an acquirer. They could buy Whiting or even Kodiak.

Is this deal a sign of a strong market? Maybe, but I think it's an indication that the easy money has been made. Investors have given these companies huge valuations. Now, it is becoming more efficiency-directed. It's going to be survival of the fittest.

The assumption is lower cost, and higher prices. For example, Whiting can rent 30 rigs at a lower per-cost rig than if they had to rent, say, 20 rigs.

This is especially important if we have lower energy prices. The deal may seem like a home run, but natural gas has been declining all month and is now near the lowest levels of the year. Despite plenty of flash points in key parts of the oil world, Brent crude is near a three-month low (Bakken is largely an oil play).

One thing for sure: if oil goes to $80 a barrel, a lot of these companies will be hard-pressed. You may be profitable, but you are not really generating an adequate return. Certainly not enough for anyone to offer a big premium for your company.

Another issue: there is no more acreage to be had. If you want growth, you need to buy a neighbor. Essentially, it's like buying beachfront properties: there are no more being made, so you have to tear someone else's house down to get bigger.

--By CNBC's Bob Pisani

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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