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WPX Teams Up With Howard Energy to Form JV in Delaware Basin

Zacks Equity Research

Oklahoma based upstream player WPX Energy, Inc. WPX recently inked a deal with a privately held midstream company, Howard Energy Partners, to form a 50-50 joint venture (JV). Per the deal, Howard Energy will develop oil gathering and natural gas processing infrastructure in Permian’s Delaware Basin, spanning vast areas of West Texas and eastern New Mexico.

Deal Highlights

The JV will support WPX’s drilling operations in the Stateline area of the Delaware Basin where the company has a holding of around 50,000 acres which amounts to about 37% of the net acre position of the company.

Per the deal, Howard Energy will complete the construction of 50 mile crude oil gathering system, which had already been started by WPX. Further, Howard Energy will also design a new cryogenic natural gas processing complex with a planned initial capacity of 400 million cubic feet per day (MMcf/d) which will be supported by natural gas and product pipelines. With the deal, Howard Energy will serve as the operator of the new assets.

The partnership is committed to initially spend $563 million of capital for the JV. To fund the JV, Howard Energy has entered into a financial arrangement with Singapore’s sovereign wealth fund, GIC Private Limited, along with existing unit holders Alinda Capital Partners and Alberta Investment Management Company. Howard Energy will pay $300 upfront to WPX. The San Antonio-based Howard Energy will fund the first $263 million of JV capex, including a $132 million carry for WPX.

Subject to satisfactory closing conditions, the transaction is scheduled to close in the third quarter of 2017. The crude gathering project is expected to get completed by the second half of 2018. The firms also expect to complete the gas processing complex’s first train with the capacity of 200 MMcf/d during the first half of 2018. The second 200-MMcfd train is expected to start by mid-2019.

Deal Motive

The strategic deal with WPX will mark the entry of Howard Energy into the Permian Basin. It will thereby diversify the partnership’s portfolio into the most prolific basin in U.S. It will provide an edge to Houston Energy over its peers and position it to raise significant amount of capital for large scale projects. The operational expertise of the partnership and the financial support along with WPX’s production track record are likely to create additional value to Howard Energy and provide it with ample growth opportunities.

For WPX, the deal will support the company’s growth plans in the Delaware Basin and extends its value creation beyond drilling and exploration by teaming up with Howard Energy as the Delaware midstream service provider. The transaction bodes well for WPX as it is expected to gain synergies and leverage the high operational expertise and skilled workforce. It is likely to enhance the company’s competitive advantage and generate additional shareholder value.

Zacks Rank & Key Picks

Headquartered in Tulsa, WPXengages in the production of natural gas, oil and natural gas liquids. The primary assets of the company are spread in North Dakota’s Williston Basin, New Mexico’s San Juan Basin and the Permian’s Delaware Basin. The company categorized under U.S. Oil & Gas Exploration and Production currently carries a Zacks Rank #3 (Hold).

WPX Energy, Inc. Price


WPX Energy, Inc. Price | WPX Energy, Inc. Quote

Some better-ranked players in the same industry include Bonanza Creek Energy, Inc. BCEI, Legacy Reserves LP LGCY and W&T Offshore, Inc.WTI. All the three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Bonanza Creek is expected to post year-over-year growth of 100.88% in its earnings in 2017.

Legacy Reserves reported a positive average earnings surprise of 11.84% in the preceding four quarters.

W&T Offshore reported positive earnings surprise in each of the last four quarters, the average being 69.21%.

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