by Aaron Levitt | July 25, 2014 6:00 am
M&A is alive and well in the energy patch these days.
The shale revolution has made North America the hot spot for a variety of energy firms looking for quality assets and production. The latest deal comes from Spanish energy firm Repsol S.A. (REPYY), which was burned pretty badly in Argentina after a government seizure of its assets. REPPY is reportedly making a play for Canada’s Talisman (TLM).
No formal agreement has been announced, and it remains to be seen what Repsol would want with Talisman on the whole. Analysts have speculated that the buy is an effort to gain access to TLM stocks stable assets in North America and the North Sea.
Whatever the case, the potential deal for Talisman — a marginal energy player at best — highlights the fervor and length larger firms are going to secure new assets.
However, investors don’t need to wait for the Talisman/Repsol deal top close to profit from this trend. There are plenty of other energy stocks to buy that have been wheeling and dealing. Here’s a look at four of the best:
Energy XXI’s (EXXI) bailiwick is buying old shallow water wells in the Gulf of Mexico that firms like Exxon (XOM) don’t want anymore. Those wells come cheap and are pretty abundant. EXXI can then spend a few bucks on various enhanced oil recovery techniques — like CO2 injection — to coax whatever oil is left out of these older wells.
It’s a pretty good and profitable business. And it’s about to get even more profitable with its recent buy of EPL Oil & Gas.
For $2.3 billion, EXXI purchased EPL — a company that’s good at finding pockets of small deposits in the Gulf. By combining the two energy stocks, you now have this pretty nimble firm that will be able to churn out hefty production from all the “junk sites” in the Gulf of Mexico that the big firms don’t want. In fact, after the buyout, EXXI is now the largest producer on the Gulf of Mexico’s shelf and is active in all 10 major production areas. That higher production should lift EXXI’s earnings by 25% in 2015 after it fully digests the EPL acquisition.
And at a forward P/E of 12 and dividend yield of 2%, Energy XI is a pretty cheap, as well.
This deal is a bit complex, but man is it a doozy
It starts with midstream stalwart Energy Transfer Partners (ETP) buying Susser Holdings (SUSS) for approximately $1.8 billion. By acquiring Susser, ETP will own the general partner (GP) interest and the incentive distribution rights (IDRs) in Susser Petroleum Partners LP (SUSP). Susser owns a ton of convenience stores and retail fuel distribution infrastructure.
That’s a great move for ETP as last year it purchased Sunoco and its fuel network. The master limited partnership (MLP) hopes to combine the two units and drop them down into SUSP. That will help boost cash flows at ETP.
But the MLP to buy in this deal isn’t ETP … it’s the general partner, Energy Transfer Equity (ETE).
The next step in the plan is for ETP transfer to ETE the GP/IDRs of SUSP. When it is all said and done, ETE will now be collecting IDRs, cash flows and dividends from the units it owns for a whopping 4 different MLPs — ETP, SUSP, Sunoco Logistics Partners L.P. (SXL) and Regency Energy Partners LP (RGP).
That’s insane for a MLP to get so many IDRs, and IT will only boost ETE’s current 2.6% yield much, much higher going forward.
After gold and copper prices cratered the last few years, leading miner Freeport-McMoRan (FCX) went back to its roots and decided to become an integrated natural resource firm. That meant adding a serious dose of natural gas and oil exposure to its portfolio. To that end, it bought energy companies Plains Exploration & Production and McMoRan Exploration back in June of 2013.
However, its latest deal strengthens its strategy of drilling in the Gulf of Mexico.
FCX is paying $1.4 billion for several of Apache’s (APA) deepwater blocks in the Gulf of Mexico. Those blocks contain roughly 55 million barrels’ worth of oil-equivalent (BoE). More importantly, those blocks fit in perfectly with the assets it acquired when it bought Plains & McMoRan.
Already, Freeport’s Gulf assets have been a boon to the energy stock’s bottom line. For the latest reported quarter, FCX saw revenues of $1.2 billion for its energy gas operations as the firm sold roughly 16 million BoE. That helped drive an impressive earnings beat because the energy division’s margins are 22% higher than its copper/gold mining operations. And with the fields being predominately oil-based, the new Gulf deal will only add to that production.
And at a forward P/E of just 12.7, FCX stock is pretty cheap.
Everyone knows that the prolific Bakken shale continues to be the hotbed of production activity. Well, it’s also becoming a hotbed of M&A activity as well. Just look at Whiting Petroleum’s (WLL) bid for smaller producer Kodiak Oil & Gas (KOG).
While KOG stock maybe the best energy stock to play the buyout — because more offers could still pour in, possibly bumping the price — there can be something said for buying the larger acquirer WLL.
With the purchase, Whiting will now be the largest firm operating in the Bakken, and it will control a whopping 855,000 net acres. That prime acreage currently produces around 107,000 BoE per day. However, by combing operations and using KOG’s better drilling technology, the new WLL will be able to boost that production to around 152,000 BoE per day in 2015. Again, that production is liquids-rich, high-priced oil production.
Overall, the deal will be almost instantly accreditive to WLL’s earnings and cash flows. Whiting will also have better access to cheaper capital due to its much larger size.
For investors, WLL is quickly becoming the Bakken energy stock du jour, and the recent deal only makes it stronger.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/07/energy-stocks-wll-fcx-tlm-exxi-ete-etp/
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