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Oil & Gas Stock Roundup: Denbury-Penn Virginia Deal is Off, Murphy Sells Malaysian Assets

Nilanjan Choudhury
Enterprise Products (EPD) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

It was a week when oil prices moved past $60 per barrel, while natural gas futures dropped.

On the news front, upstream players Denbury Resources Inc. DNR and Penn Virginia Corporation PVAC agreed to dissolve the strategic agreement that they entered into last October. Meanwhile, Murphy Oil Corporation MUR signed a deal to sell oil and gas assets in Malaysia.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures edged up 0.4% to close at $59.04 per barrel, natural gas prices lost 1.5% to $2.753 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Transocean's Contract Awards, Eni's Angola Discovery & More)

The U.S. crude benchmark rallied to four-month highs, after government data showed a large weekly decline on surging exports. Further to this, hefty draws in product inventories (gasoline and distillate) boosted bullish sentiment in the energy market. As it is, crude is being supported by the so-called OPEC+ deal that is cutting production by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran also continue to tighten the commodity’s fundamentals.

However, natural gas prices dropped on smaller-than-average decrease in supplies and forecasts of warmer weather, which might lead to the heating fuel’s tepid demand.

Recap of the Week’s Most Important Stories

1.    Denbury Resources and Penn Virginia’s $1.7-billion acquisition deal has been called off via mutual agreement. For each Penn Virginia stock, Denbury was supposed to pay $25.86 in cash and 12.4 shares of its common stock. There will be no termination fee involved in the process, per the agreement.

Denbury made the merger agreement as Penn Virginia’s Eagle Ford assets were expected to have a low breakeven point, which could have complemented its portfolio. The acquisition could have brought in opportunities of short cycle development to the company’s medium cycle development assets. The combined entity was expected to have an enterprise value of $6 billion. Following the closure of the transaction, Denbury stockholders were expected to hold around 71% of the combined entity. However, opposition from shareholders of Penn Virginia, like Mangrove Partners, led to the termination.

Activist investment fund Mangrove Partners, a major shareholder of Penn Virginia, has been very vocal against the merger since the very beginning. Last year, it increased its active stake in Penn Virginia to 10.7% from 9.5% and called on the termination of the merger deal, which was expected to be closed in the first quarter of 2019. (Read more Denbury & Penn Virginia Mutually Abort $1.7B Merger Plan)

2.    Murphy Oil announced that its subsidiary has entered into an agreement to sell two of its Malaysian assets in an all-cash transaction worth $2.127 billion. The assets will be sold to PTT Exploration and Production Public Company Limited (“PTTEP”). In addition to the purchase price, PTTEP will also pay $100 million in a bonus payment contingent upon certain future exploratory drilling results prior to October 2020. Subject to required approval from different agencies, this transaction is expected to close in the second quarter of 2019.

Murphy Oil intends to utilize the proceeds through share buyback, repayment of debts and investment, in order to expand its operation in oil-focused domestic assets. Murphy Oil plans to invest $750 million of the proceeds to expand its operation in oil-rich Eagle Ford Shale and the Gulf of Mexico. The Zacks Rank #3 (Hold) company might opt for acquisitions or fund both deep-water projects and U.S. onshore opportunities.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In addition, $750 million will be utilized to strengthen its balance sheet by reducing outstanding debt. The company will utilize $325 million to pay off its senior credit facility to a zero balance and $425 million targeted to the repurchase or redemption of outstanding senior notes. (Read more Murphy Oil to Sell Malaysian Assets to Focus on Domestic Oil)

3.    The Williams Companies, Inc. WMB recently reported that it has inked a deal with the Canada Pension Plan Investment Board (“CPPIB”) to create a joint venture (JV), in order to optimize the company’s midstream operations in the western Marcellus and Utica basins. The $3.8-billion partnership incorporates Williams’ Ohio Valley Midstream and Utica East Ohio Midstream systems.

Per the agreement, which is expected to be concluded within the next two quarters, CPPIB will acquire a 35% stake in the JV for around $1.34 billion. Williams is expected to retain the remaining interest in the partnership and act as the operator. Notably, the company acquired the remaining 38% stake in the Utica East Ohio Midstream from Momentum Midstream and included it in the JV’s asset base. The midstream property processes and fractionates natural gas and natural gas liquids (NGLs) in the prolific Utica shale play.

Williams expects the formation of the JV to create cost synergies, and reduce operating and maintenance costs in the assets mentioned above. The move will create an opportunity for the company to invest in the Utica region in a more efficient manner and enable it to provide its clients with enhanced services. This, in turn, will strengthen the company’s presence in the Northeast. (Read more Williams Forms Marcellus, Utica JV With Canadian Fund)

4.    Imperial Oil IMO has decided to decelerate development of Aspen in situ oil sands project amid pipeline crisis and market uncertainty in Canada. The integrated energy company gave a green signal to the C$2.6-billion project in November 2018 with intent to commence production by 2022. The Aspen project is likely to produce 75,000 barrels of oil per day as well as generate direct and provincial revenues of more than C$4 billion along with C$10 billion in royalties for Alberta.

The project is likely to be delayed by at least a year due to intervention by Alberta government along with other competitive issues. Notably, the project was sanctioned before the government of Alberta announced its production curtailment program in response to the widening crude price differentials. The province issued a mandate on Dec 2, 2018 to remove 325,000 barrels of oil production per day from the market beginning in 2019.

While the government’s intervention narrowed the differentials (from $44 a barrel in December to near about $10 currently), the scenario is still uncertain amid the pipeline pinch. The delay of Enbridge’s   Line 3 project along with the latest court rulings for TransCanada’s Keystone XL pipeline is making it difficult for companies to balance output levels with pipeline capacity without mandated cuts. (Read more Imperial Oil Ramps Down Aspen Project Amid Market Uncertainty)

5.    Petrobras PBR  is reportedly set to receive around $10 billion from the Brazilian government to settle the ‘transfer-of-rights’ dispute. The dispute basically relates to the oil-producing zone offshore Brazil (known as the ‘transfer-of-rights’ area) and dates back to 2010. Notably, in 2010, the government granted Petrobras the right to explore 5 billion barrels of oil and gas off the Brazilian coast, in return of additional shares in the company. The government’s move was seen as an effort to maintain control in the state-owned energy giant.

It was estimated thereafter that the ‘transfer-of-rights’ area held recoverable resources comprising around 15 billion barrels of oil and gas, which was in excess of what Petrobras was entitled to produce under the 2010 deal.

Per latest updates, both the parties are close to reaching a final agreement, wherein Petrobras is likely to receive a compensation of around $10 billion from the government. Further, the Brazilian oil giant is likely to receive payments from third-party bidders who are seeking to partner with it to develop deepwater oil projects. Hence, the companies bidding for the exploration of the area have to compensate Petrobras to the extent to which the latter has already invested in those blocs. Bloomberg projects Petrobras to receive an additional $9 billion from the companies, in addition to the payment it will be receiving from the government. (Read more Petrobras Eyes $10B on Government Dispute Resolution)

Price Performance

The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.

Company

Last Week

Last 6 Months

XOM

+0.4%

-6.8%

CVX

-1.8%

+0.8%

COP

-2.2%

-13.2%

OXY

-0.4%

-19.6%

SLB

-2.1%

-30.2%

RIG

-0.8%

-34.7%

VLO

-0.5%

-26.6%

MPC

+1.4%

-27.6%

The Energy Select Sector SPDR – a popular way to track energy companies – remained essentially flat last week. But longer-term, over six months, the sector tracker is down 13.8%. Offshore driller Transocean Ltd. RIG was the major loser during this period, experiencing a 34.7% price decline.

What’s Next in the Energy World?

As usual, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count.

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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
Imperial Oil Limited (IMO) : Free Stock Analysis Report
 
Transocean Ltd. (RIG) : Free Stock Analysis Report
 
Williams Companies, Inc. (The) (WMB) : Free Stock Analysis Report
 
Denbury Resources Inc. (DNR) : Free Stock Analysis Report
 
Murphy Oil Corporation (MUR) : Free Stock Analysis Report
 
Penn Virginia Corporation (PVAC) : Free Stock Analysis Report
 
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