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Natural Gas’ Most Likely M&A Targets

The Dow dropped 133 points on Thursday, while the S&P 500 slipped 1.2%. But rather than dig for the source of those losses, Cramer started Mad Money with focus on natural gas. He said viewers’ emails and fans’ questions at his book signings have centered on what to do now that Exxon Mobil has bought XTO Energy.

Cramer’s recommendation? Take profits on XTO and move on.

It may be hard to sell a stock that has returned about 4,500% over the past 15 years, but the strategy now is to find the next potential takeover target. And Cramer expects more acquisitions to come, especially as Exxon’s move was a ringing endorsement for the future of natural gas.

The Mad Money host scanned the sector and found two names – Chesapeake Energy and Range Resources – that closely resemble XTO and make good M&A prospects. Like XTO, both of them control reserves that are more than 80% natural gas, and they operate at the industry’s cutting edge, using well fracturing and horizontal drilling to tap hard-to-reach shale nat gas. These reserves are expected to satisfy about 50% of the commodity’s demand by 2030.

Chesapeake Energy, with its 12 trillion cubic feet of proven reserves and shale exposure, is closest to XTO, Cramer said. The company is the number one or two leaseholder in the Haynesville shale, located in Louisiana and East Texas, Texas’ Barnett shale, Appalachia’s Marcellus shale and Arkansas’ Fayetteville shale. Chesapeake’s also a low-cost producer with a great CEO in Aubrey McClendon. And the relationship with BP, a joint venture in the Fayetteville, puts Chesapeake in perfect position for a takeover.

Range Resources is a smaller player with 2.7 trillion cubic feet reserve base, but it too is a low-cost producer with significant shale exposure. The company operates in the Marcellus, the Barnett and Virginia’s Nora Field. RRC has enjoyed much the same run as its natural gas peers. While Chesapeake is up 829% over the past decade, Range Resource has soared 2,530%. The S&P 500 has dropped 21% over that same period.

Both of these stocks work even without a takeover bid, Cramer said, but Chesapeake and Range Resources do make likely targets. He recommended that investors roll their XTO profits into one of these two companies.

“After this deal,” Cramer said of Exxon buying XTO, “I really can’t imagine that either of these companies will be stand-alone companies this time next year.”

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