It was a week where oil prices edged up but natural gas futures ended lower.
On the news front, Eclipse Resources Corp. ECR agreed to combine with peer Blue Ridge Mountain Resources to form a $1.4 billion natural gas biggie, while oilfield services behemoth Schlumberger Ltd. SLB agreed to offload its marine seismic acquisition business for $600 million.
Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures rose 1.3% to close at $68.72 per barrel, natural gas prices fell some 1% to 2.917 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Diamondback's Acquisition Steals the Show)
The U.S. crude benchmark gained for only the second time in eight weeks after the Energy Department's inventory release showed that stockpiles recorded a large draw on the back of strong refinery runs. Worries that Washington’s looming sanctions against Iran will significantly tighten supplies also contributed to the gains, while the dollar weakness made the greenback-priced crude cheaper for investors holding foreign currency
Meanwhile, natural gas prices declined owing to bearish weather predictions and strength in the commodity’s production.
Recap of the Week’s Most Important Stories
1. Eclipse Resources recently inked a deal to merge with its industry peer Blue Ridge Mountain Resources. Notably, post the announcement of the deal, shares of Eclipse Resources dipped 11.3% to close at $1.49 on Aug 27, reflecting investors’ disappointment toward the deal.
The deal is valued at $908 million in equity, wherein Zacks Rank #1 (Strong Buy) Eclipse Resources will exchange 4.4259 shares of its common stock for each share of Blue Ridge. The transaction values Blue Ridge at $7.44 based on Eclipse Resources’ closing price on Aug 24. With the closure of the transaction, there will be a 15-to-1 reverse stock split of Eclipse Resources. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The deal will help the companies to consolidate their premier properties, resulting in higher production and cash flow. The combined entity is likely to own more than 227,000 net undeveloped core acres in the Utica and Marcellus regions. The new entity is set to have 735 net locations, representing a 94% and 106% increase for Eclipse Resources and Blue Ridge, respectively.
With the merger, Eclipse Resources forecasts its output level to grow 20% at an annual rate, being within the cash flows. In fact, the company expects to generate free cash flow starting from 2020. (Read more Eclipse Resources, Blue Ridge Unite to Form Utica Gas Major)
2. Schlumberger Ltd. recently announced the sale of its business unit WesternGeco’s marine seismic acquisition properties to Shearwater GeoServices Holding AS through a cash and stock deal. Shearwater will pay the acquiree $600 million in cash. The deal is expected to close in the fourth quarter of 2018, following which Schlumberger will receive an additional 15% equity interest in Shearwater. Additionally, Shearwater will pay Schlumberger for the usage of the acquired vessels in the future over and above some specific thresholds for a limited time period.
Per the deal, Schlumberger will give 10 high-end seismic acquisition vessels involved in the business to Shearwater along with WesternGeco’s proprietary marine seismic technology. The manufacturing and development properties located in Norway and Malaysia are also included in the transaction. The deal entitles Schlumberger with the option of using two Shearwater vessels for potential “multiclient work” during the first two years post-closing of the transaction.
Schlumberger included WesternGeco activity in its Reservoir Characterization segment. The divestment is in line with Schlumberger’s strategy of making the segment an asset-light business. The company decided to get rid of the land and marine seismic acquisition business in January, as it could not meet its future return expectations. Even in the second quarter of 2018, lower WesternGeco activity led to a decline in Reservoir Characterization segment revenues. (Read more Schlumberger to Divest WesternGeco Assets to Shearwater)
3. Enbridge Inc. ENB and Spectra Energy Partners have inked a deal, per which the former will acquire all the outstanding public common units or 17% of the partnership that it doesn’t already own.
Per the deal, Enbridge will offer 1.111 common shares for each Spectra Energy Partners’ outstanding unit. The current proposal is an improvement over the previous one, wherein Enbridge had agreed to exchange 1.0123 of its common shares for every common unit of Spectra Energy Partners. Based on the closing price of Enbridge's common shares on the New York Stock Exchange (NYSE) on Aug 23, 2018, the transaction is valued at $3.3 billion (CAN $4.3 billion).
Enbridge, which already owned 83% of Spectra Energy Partners, sees the transaction as an effort to restructure its corporate structure. In particular, the company's move comes after Federal Energy Regulatory Commission announcement in 2018 to alter a tax policy that allowed master limited partnership interstate oil and natural gas pipelines to retain an income-tax allowance in cost-of-service states.
4. Magnolia Oil & Gas Corp. MGY recently announced that the company will buy most of the South Texas properties of Harvest Oil & Gas Corp. in a stock and cash deal. The acquisition is expected to cost Magnolia roughly $191 million.
The deal is expected to add around 15 net locations in the company’s core Karnes County inventory. In the first half of 2018, these properties produced 1,400 barrels of oil equivalent per day (Boe/d), of which 69% was oil. Moreover, about 114,000 net acres will be added to Magnolia’s Giddings Field location, which produced 3,400 Boe/d during the first half of 2018, with 27% oil. In the first six months of this year, the acquiree generated $25 million in operating profit from the properties.
The acquisition is expected to add tremendous value to Magnolia’s South Texas operations while increasing its presence and complementing its position in the region. The deal provides Magnolia with an undivided position in the Eagle Ford shale, wherein majority of its operations take place. (Read more Here's Why Magnolia's $191M Acquisition is a Significant One)
5. Plains All American Pipeline, L.P. PAA and Magellan Midstream Partners, L.P. MMP have announced to sell their respective 30% and 20% of stakes in the joint venture, BridgeTex Pipeline Company, LLC to OMERS.
Plains All American Pipeline decided to sell off the equity stake for $862.8 million and to retain 20% of its balance equity stake in the joint venture. The proposed transaction is expected to be closed by fourth-quarter 2018, subject to regulatory approvals.
BridgeTex Pipeline is a 50/50 joint venture between Magellan Midstream and Plains All American. With a capacity of around 440,000 barrels per day, the pipeline delivers Permian Basin crude oil from Colorado City, TX to the Houston Gulf Coast area.
The firm has been divesting assets to fund its business capital requirement. After getting rid of $1.1 billion non-core assets in 2017, the partnership now aims at selling off nearly $700 million assets in 2018 to further strengthen its core operations and also continue with its capital projects. (Read more Plains All American to Sell 30% Interest in BridgeTex)
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.
Last 6 Months
Reflecting the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.7% return last week. The best performer was offshore drilling powerhouse Transocean Ltd. RIG whose stock soared 9.5%.
Longer-term, over six months, the sector tracker is up 12.5%. Large independent producer ConocoPhillips is far and away the major gainer during this period, experiencing a 35.2% price appreciation.
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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