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Deals by Chesapeake, Viper Energy & Phillips 66 Dominate Oil & Gas Stock Roundup

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It was a week when oil prices were up slightly, although natural gas experienced a sharp decline.

On the news front, the headlines came from shale pioneer Chesapeake Energy (CHK - Free Report) , royalty-focused oil and gas player Viper Energy Partners (VNOM - Free Report) , and downstream company Phillips 66’s (PSX - Free Report) deal announcements.

Overall, it was a mixed week for the sector. West Texas Intermediate (WTI) crude futures inched up 0.2% to close at $68.44 per barrel, while natural gas prices lost 6.7% to end at $3.86 per million British thermal units (MMBtu).

Oil prices finished marginally higher after a weekly report from the Energy Information Administration ("EIA") showed a stockpile draw. The fall in domestic oil stocks was accompanied by a decrease in gasoline inventories. Prices were also boosted by a weaker dollar, which made the fuel cheaper to the holders of other currencies. However, the commodity pared back most of its gains following calls from the White House for the OPEC+ cartel to increase oil production.  

On the other hand, natural gas finished lower last week, pressured by a bearish inventory report and subdued cooling demand.

Recap of the Week’s Most-Important Stories

1.  Chesapeake Energy entered an agreement with Vine Energy to acquire the latter for its natural gas properties in the stacked Haynesville and Mid-Bossier shale plays in Louisiana. The acquisition is a zero-premium transaction, which is valued at $2.2 billion.

In 2020, Chesapeake went bankrupt after years of overspending on acquisitions, which led to an enormous debt burden. Subsequent to its emergence from Chapter 11 bankruptcy, the Zacks Rank #1 (Strong Buy) oil and gas producer was uniquely placed to engage in mergers and acquisitions to rebuild its stock momentum.

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

The transaction will increase Chesapeake's cumulative five-year free cash flow outlook by $1.5-$6 billion. Moreover, it is expected to generate average annual savings of $50 million from operating and capital synergies.  The deal strengthens the company’s post-reorganization focus on natural gas and will more than double its gas output from the Haynesville shale field in Louisiana. (Chesapeake Signs $2.2B Agreement to Acquire Vine Energy)

2.   Viper Energy Partners announced a definitive purchase and sale agreement with Swallowtail Royalties LLC and Swallowtail Royalties II LLC. Per the accord, the publicly traded Delaware limited partnership – an affiliate of Diamondback Energy – has agreed to acquire certain mineral and royalty interests for a consideration of $225 million of cash and 15.25 million units of Viper common stock.

The deal involves the acquisition of 2,302 net royalty acres, located in the Northern Midland Basin. Of the acreage, roughly 65% is operated by Diamondback. Thus, the Diamondback-operated acreage of the partnership will likely jump more than 10% to 14,191 net royalty acres.

Viper Energy believes that once the deal closes, likely by the early December quarter of this year, it will be accretive to available cash for distribution per common unit. The partnership projected that with Diamondback’s accelerated development activities, the available cash for distribution per common unit will continue to grow. (Viper Signs a Deal to Acquire Northern Midland Basin Acres)

3.   Phillips 66 recently agreed to acquire a 16% interest in an Australian lithium-ion battery material supplier NOVONIX Limited, as the demand for electric vehicles’ (EV) batteries is expected to surge in the coming days. The deal is valued at $150 million and is supported by Emerging Energy organization, which is responsible for Phillips 66’s low-carbon business development.

Per the deal, one director will be nominated by Phillips 66 to NOVONIX’s board. NOVONIX is boosting synthetic graphite production capacity at Chattanooga, TN, to 10,000 metric tons (mt) per annum by 2023. Investment from Phillips 66 is expected to further boost the capacity to 30,000 mt/annum by 2025.

Phillips 66’s oil refining business provides by-products that are used in developing carbon anodes and other substances for lithium-ion batteries. It manufactures a specialty coke, which is used for making batteries for electric vehicles. This February, the company made another deal with Faradion to develop high-performing anode substances for sodium-ion batteries at a low cost. (Phillips 66 to Acquire 16% NOVONIX Stake for $150M)

4.   Oilfield services provider TechnipFMC plc (FTI - Free Report) formed an alliance with Loke Marine Minerals (or Loke) to establish enabling technologies for the extraction of seabed minerals in Norway. As the energy transition continues to gain momentum, TechnipFMC will target several market opportunities in energy transition to address the increasing needs for clean energy technologies and resources.

Seabed minerals have been identified by global bodies like The World Bank, World Economic Forum and International Energy Agency as a potent resource in meeting the ever-increasing demand for metals in diverse areas. This includes electric vehicle batteries, clean energy technology and consumer electronics.

Hence, TechnipFMC invested in a minority stake in Loke, which is a leading provider of marine minerals for the green energy transition. TechnipFMC has an 18% minority ownership interest in marine mineral explorer Loke. Wilhelmsen Holding and NorSea Group have also taken an ownership interest in Loke, holding an 18% stake jointly. (TechnipFMC Invests in Marine Minerals for Energy Transition)

5.  The Williams Companies (WMB - Free Report) entered an agreement with the subsidiaries of Royal Dutch Shell and Chevron to provide offshore natural gas gathering and crude oil transportation services for the Whale deep-water field development in the southern part of the U.S. Gulf of Mexico.

Per the terms of the agreement, the midstream operator will also provide onshore natural gas processing services for the Whale development, which is regarded as one of the largest oilfield discoveries in the past 10 years. Shell Offshore is the operator of the project, with a 60% participating interest, while Chevron owns the rest.

The Whale development holds a recoverable resource of 490 million barrels of oil equivalent. Notably, it is expected to achieve the peak production of 100,000 barrels of oil equivalent per day. Production from the oilfield is likely to begin in 2024. (Williams to Offer Its Services for Whale Development)

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 six months.

Company    Last Week    Last 6 Months

XOM               -0.4%               +7.5%
CVX                0.0%                +8.4%
COP               -0.9%              +12.2%
OXY                -2.3%               -6.3%
SLB                -0.2%               +3.6%
RIG                 -4.6%               -10.3%
VLO                -0.4%               -3.6%
MPC               +3%                  +13.5%

The Energy Select Sector SPDR — a popular way to track energy companies — edged down 0.2% last week. The worst performer was offshore driller Transocean Ltd. (RIG - Free Report) whose stock lost 4.6%.

But over the past six months, the sector tracker has increased 5.9%. Downstream biggie Marathon Petroleum was the major gainer during the period, experiencing a 13.5% price appreciation.

What’s Next in the Energy World?

As the global oil consumption outlook strengthens amid tightening fundamentals, market participants will be closely tracking the regular releases to watch for signs that could further validate the upward momentum. In this context, the U.S. government’s statistics on oil and natural gas — one of the few solid indicators that come out regularly — will be on energy traders' radar. Data on rig count from the energy service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is closely followed too. News related to coronavirus vaccine approval/rollout/distribution will be of utmost importance. Last but not the least, investors will closely scrutinize the effects of the rapidly spreading Delta variant outbreak on crude demand.