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Oil & Gas Stock Roundup: Drilling Industry Enjoys M&A Boom

Zacks

It was a week where oil prices ended at their highest settlement since late 2014, while natural gas futures rallied to their highest levels since January.

On the news front, the sector witnessed a spate of mergers and acquisitions activities, particularly in the drilling space. Offshore driller Ensco plc ESV agreed to snap up smaller rival Rowan Companies plc RDC in a $2.38 billion deal, while Canada’s Precision Drilling Corp. PDS is set to acquire its peer Trinidad Drilling Ltd. for C$1.03 billion.

Overall, it was another good week for the sector. West Texas Intermediate (WTI) crude futures rose 1.5% to close at $74.34 per barrel, while natural gas prices gained 4.5% to $3.143 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: LNG Canada Progress, Brazil Auctions & More)

The U.S. crude benchmark gained for the sixth time in seven weeks on prospects ofa supply crunch once the U.S. sanctions on Iran’s energy sector are implemented from Nov 4. Data showing drillers in the United States cutting oil rigs for third consecutive week brought further upside.


Meanwhile, natural gas jumped to its highest in eight months as inventories remain significantly below their five-year average ahead of the upcoming winter.

Recap of the Week’s Most Important Stories

1. Offshore drillers Ensco and Rowan Companies have reached an agreement to merge in an all stock deal. The enterprise value of the combined entity is projected at $12 billion, based on the closing price of the companies’ shares on Oct 5, 2018. The combined company will have a fleet of 82 offshore rigs, which includes 28 floaters and 54 jack-ups.

The merged entity expects to realize annual pre-tax synergies of about $150 million. Of the total, more than 75% of targeted synergies are projected to be realized within a year of closing. The deal, expected to close in the first half of 2019, is projected to be accretive to cash flow per share in 2020.

The combined company’s balance sheet is expected to have liquidity of about $3.9 billion, including $1.9 billion of cash and short-term investments. (Read more Ensco to Merge With Rowan, Form Leading Offshore Driller)

2. In a bid to further cement its market position, Canada’s largest drilling contractor Precision Drilling Corp. is set to acquire its peer Trinidad Drilling Limited, the third largest driller in the nation, in a deal worth C$1.03 billion.

Subject to satisfactory closing conditions and other regulatory approvals, the deal is set for closure by late 2018. Post the culmination of the deal, Precision will own 71% stake in the combined entity and Trinidad will hold the remaining 29%.

Acquiring Trinidad’s super-spec American rig fleet has been the primary deal motive for Precision. Notably, the Canadian drilling industry is still mired in funk due to widening differentials, along with the oversupply of rigs and stiff competition.

The deal looks fairly compelling for Precision as it solidifies the company’s position in the relatively lucrative U.S. counterpart, wherein drilling demand is soaring, given advanced technologies. (Read more Precision Outbids Ensign in C$1.03B Buyout of Trinidad)

3. Bringing in pleasant news for Williams Companies Inc. WMB, the U.S. Federal Energy Regulatory Commission (FERC) recently gave its final nod to place Atlantic Sunrise Pipeline into service. Williams’ Atlantic Sunrise pipeline project is likely to come online from tomorrow.

Importantly, the Atlantic Sunrise natural gas pipeline, worth $3 billion, is an expansion of the company’s Transco pipeline, which is the largest-volume natural gas transmission system in the United States. It will transport Marcellus and Utica shale gas from Pennsylvania to other parts of the country. Supported by long-term shipping commitments, Williams boosted the transportation capacity of Atlantic Sunrise by 12% to 15.8 billion cubic feet per day (Bcf/d).

The company expects the pipeline to add value to its existing energy infrastructure, which will provide it with a steady flow of revenues in the future. This will also help citizens by providing them access to an affordable and clean energy source, as well as contribute to the economic growth of the country. (Read more Williams Gets Final Go-Ahead for Atlantic Sunrise From FERC)

4. Encana Corporation ECA recently clinched a $480-million (or C$615 million) deal to offload its San Juan assets located in New Mexico to privately held DJR Energy, LLC.

Per the deal, Encana will vend 182,000 net acres, which accounted for 5,400 barrels of oil equivalent per day (72.2% liquids) of average production in 2017. Subject to satisfactory closing conditions, the transaction is scheduled for closure in the fourth quarter of 2018.

The deal will advance Encana’s strategy to concentrate on its four core basins, namely Montney and Duvernay gas formations in British Columbia and Alberta, and the Permian and Eagle Ford shale plays in Texas. The transaction will streamline the company’s portfolio through the sale of non-core assets and help it to refocus its production spending in core plays and fewer geographical areas. (Read more Encana to Vend San Juan Assets, Optimize Portfolio)

5. Chevron Corporation CVX recently inked a deal to divest its entire stake in the Rosebank oilfield to Equinor ASA, in a bid to streamline its portfolio and raise funds for future domestic capital expenditure. The financial terms of the deal have been still kept under wraps.

Located offshore of the Shetland Islands, Rosebank field is expected to have recoverable volume of more than 300 million barrels. Notably, Chevron’s plan to develop the field was put on the back burner during the industry downturn. Even after the crude price rally, the Zacks Rank #1 (Strong Buy) company is more focused to invest in the lucrative shale exploration in Permian, along with some of its major projects in the Gulf of Mexico and Kazakhstan. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The decision to offload North Sea holdings seems to be a prudent one, as extracting oil from the region is not so economical since production costs are much higher than returns. (Read more Chevron to Sell Rosebank Oilfield Stakes to Equinor)

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%

+15%

CVX

+2.5%

+7.6%

COP

+1.3%

+29.1%

OXY

-0.9%

+18.6%

SLB

+3.4%

-2.1%

RIG

-2.1%

+41.1%

VLO

+3%

+21%

MPC

+5.7%

+17%

Reflecting the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +1.9% return last week. The best performer was oil refiner and marketer Marathon Petroleum Corp. MPC whose stock rose 5.7%.

Longer-term, over six months, the sector tracker is up 13.9%. Offshore drilling contractor Transocean Ltd. was the major gainer during this period, experiencing a 41.1% 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. Finally, the closely watched monthly reports from three key agencies (EIA, OPEC and the IEA) are due for release later this week.

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