In an interview last week with the Financial Times, ConocoPhillips (NYSE: COP) CEO Jim Mulva told the paper he was looking for acquisitions in deepwater and shale. Read along, and I'll tell you the three stocks I believe are on his short list.

The strategy
 Last year, ConocoPhillips announced a strategy of "shrinking to grow," where the company planned to sell off assets to focus on core and strategic operations with the potential for high growth. Deepwater is one area where there are outsized opportunities for growth.

In the interview, Mulva said, "We would like to be more in the Gulf of Mexico; we have been late to this opportunity. We feel we have the capital, technology, people, and the good safety record." Conoco has shown interest and has some experience. The company has deepwater operations in the North Sea and is one of the founding members of the Marine Well Containment Co., which was formed after the BP disaster to respond to oil spills in the Gulf of Mexico.

On shale, Mulva is looking at newer fields, saying, "We're trying to find the new Marcellus and the new Eagle Ford. We are putting quite a bit of effort in this in the U.S., Canada, Eastern Europe, and China." So where will ConocoPhillips strike?

Here are three stocks I think should be on Mulva's short list.

ATP Oil & Gas (Nasdaq: ATPG)
ATP is an exploration and production company focusing on deepwater in the Gulf of Mexico and the North Sea. Unlike most of its peers, ATP takes the "E" out of the equation. It does this by buying proven, yet undeveloped, offshore fields and bringing them into production. ATP Oil & Gas has long caught my eye. Last year, ATP Oil & Gas was expected to drill four wells that would transform the company into a cash flow machine. The company finished one well early in the year, but then the disaster in the Gulf of Mexico with Transocean's Deepwater Horizon happened, and all drilling ceased. Drilling has since resumed.

I believe ATP is at least 50% undervalued, and I have purchased long-term call options on the shares. Buying ATP would make sense for ConocoPhillips since it would be acquiring one of the most experienced deepwater operators, expanding its operations in the North Sea, and could use its resources to mitigate ATP's debt woes.

Kodiak Oil & Gas (AMEX: KOG)
Kodiak is an E&P focusing on the Bakken in North Dakota and Montana. The company is sitting on 69,000 net acres and currently has 17 net wells producing oil. The firm currently has two drilling rigs operating and will add a third this quarter. The Bakken has an advantage over other formations in that it sits above the Three Forks-Sanish formation, which also produces oil. This means a company can use the same drill to reach two formations, with the potential to significantly increase oil production across the same acreage.

Buying Kodiak would make sense for ConocoPhillips since it would be acquiring acreage in a developing nonconventional oil play. While not as large as Continental Resources, Kodiak is a digestible size for ConocoPhillips and wouldn't eat up its entire acquisition budget, which is estimated to be $13 billion.

Ultra Petroleum (NYSE: UPL)
Ultra Petroleum is an E&P focused on Wyoming's Green River Basin and Pennsylvania's Marcellus. Notably, the company has some of the lowest production costs in the business, averaging roughly $2.61 per mcfe compared with the industry average of $5.41. Like Range Resources (NYSE: RRC), its capital structure and breakeven drilling costs enable it to withstand the natural gas market's cyclicality. While most operators are losing money at today's $4 price for natural gas, Ultra is one of the few that still is making money. This is important to investors and Ultra's management team, which has an obsession with investment returns. CEO Michael Watford has said Ultra wants to "make money first and ... grow second."

Management's incentive packages back up that statement, as cash bonuses are based on cash flow, net income, and three-year production growth, while stock awards are based on return on equity, reserve replacement, and production growth. Ultra would be a large acquisition for ConocoPhillips with an enterprise value of $9 billion, but Ultra's operating structure and strong management are worth it.

These are the stocks to watch. Don't focus entirely on market darlings such as Chesapeake Energy (NYSE: CHK) and SandRidge Energy (NYSE: SD). It pays to dig deeper.

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