A wild flurry of takeovers in the Calgary oilpatch has created a dangerous game for shareholders betting on the next target.

That game turned into a game of Russian roulette recently when shareholders of Rio Alto Exploration (RAX-TSE), the patch’s morning-line favourite takeout candidate, had a corporate bombshell dropped in their laps, a surprise that investors ought to be conditioned to by now, thanks to Enron, Nortel et al.

Instead of the takeover news and spike in the share price investors had been expecting for months, the gun backfired on them as Rio, one of the few major Canadian gas plays left standing, announced it was slashing its reserve estimates by more than one-third.

On the day of the stunning announcement, Rio’s shares plummeted 17 per cent to $15.22 on 11 million shares, which represented a $175 million haircut for the market cap of the company.

It looks like the Calgary Flames aren’t the only team of Murray Edwards who will be missing the playoffs (Rio is one of the stickhandling oil baron’s major holdings along with the Flames).

Much of the hype over Rio in recent months was fuelled by a posse of zealous analysts touting the company’s takeover potential.

But putting too much stock in analyst recommendations is a lesson investors should have learned all too well by now.

In November, the bullish Peter “Back-Up-The-Truck” Linder, a Calgary-based analyst with Research Capital, dubbed Rio a “sitting duck” in a research report, touted it as a takeout at a price over $30 and concluded that “even with no takeover, the tide will raise all ships, including Rio Alto.”

But not everyone on the street was trumpeting debt-riddled Rio.

Also in November, Wilf Gobert of Peters & Co. issued a report downgrading Rio to “reduce.”

Wrote Gobert: “The latest update shows a deterioration in production and cash flow outlook, with a much reduced capital spending program due to a high level of debt. The speculative reason to hold this stock is for a takeover or a dramatic upturn in gas prices.”

Gobert was on the money. Rio reported fourth-quarter losses of $172 million or $2.29 a share after showing $98.5 million profit in the same period a year earlier.

Rick Cones, CEO of Rio, said the revision of reserve estimates had to be made because the company had mistakenly expected its new gas wells in northwestern Alberta to yield the same kind of production as its old wells had.

But that provided little consolation to investors who were anticipating a revision of about 10 per cent, based on a comment from Cones last month when the company first warned it would be restating reserves.

There’s another expensive stock market lesson here: If you’re betting on a takeover, you’re probably better off rolling the dice at a craps table in Las Vegas.

At least in Vegas, you go broke with a smile on your face.

* STREET TALK: “The economy not only appears to have turned the corner, it may be even stronger than people expected. The Fed (U.S. Federal Reserve) may boost (interest) rates, but they’ll be doing so from levels that, from a historical perspective, are unrealistically low. Even if they boost rates by half a point over the next six months, I don’t think that should shake the market.”

– John Forelli, senior vice-president and portfolio manager, Independence Investment.

* MA BELL GONGED: The cracks in the armour of one-time Bay Street darling BCE Inc. (BCE-TSE) are starting to show and the biggest chink in the armour concerns the company’s gamble on diversifying into e-commerce through its subsidiary, BCE Emergis (IFM-TSE).

BCE, the communications conglomerate which owns 65 per cent of BCE Emergis, has fallen out of favour with investors as its stock continues to flounder, recently dipping to $31.45.

BCE Emergis stock lost almost 35 per cent as the company cut its revenue forecast.

One question. How in the heck will BCE-owned ROB-TV fill its time slot for Market Call if the fund managers on the show aren’t drooling over BCE stock?

* SAGE ADVICE: “Don’t hire an investment manager you can’t fire or don’t sign a no-cut contract.”

– Investment author Harry Browne.



HOT ALBERTA STOCK: Isotechnika Inc.
ISA-TSE $4.75
Up $1.05 (+28.4%) on 1,647,100 shares (for week ending March 22).
While most drug developers have been taking it on the chin in recent months, Isotechnika has become a knockout with shareholders after announcing it was in talks with an unidentified "leading international pharmaceutical firm" to negotiate a joint drug-development agreement.

Edmonton-based Isotechnika is developing immunosuppressant drugs for treatment of autoimmune diseases. The stock is within striking distance of its year high of $5.40.



COLD ALBERTA STOCK: Purcell Energy
PEL-TSE $2.80
Down 65 cents (-18.8%) on 2,223,600 shares (for week ending March 22).
Judging by the massive volume on which Purcell stock was pounded, shareholders braced themselves for news, but the company provided no insight as the share price plunged and wild rumours lit up the chatboards. The Calgary-based oil and gas company hasn't had a release since December when it announced a $9.12 million financing.