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Oil & Gas Stock Roundup: Marathon Oil to Buy PayRock Energy, Pioneer Expands Midland Footprint

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It was a week where oil prices fell to its lowest close since May, but natural gas futures soared to a 9-month high.

On the news front, Marathon Oil Corp. (MRO - Free Report) announced the purchase of Oklahoma-based PayRock Energy for $888 million, while Pioneer Natural Resources Co. (PXD - Free Report) has agreed to acquire properties worth $435 million in the Midland Basin acreage.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 2.2% to close at $47.98 per barrel, natural gas prices were up 2.6% to $2.623 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell Unveils New Strategy, BP to Spin Off Norway Business.)

Oil prices moved south for just the third time in 11 weeks after a Baker Hughes report showed rise in the U.S. oil rig count for the third successive week – indicating resurgence in shale drilling activities. Things were further hampered by the uncertainty surrounding U.S. Federal Reserve’s timing and path of rate hike this year. The commodity has also been dragged down by the looming possibility of Britain leaving the European Union.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Natural gas rose again following a lower-than-average build and predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days.

Recap of the Week’s Most Important Stories

1.    Houston, TX-based leading upstream energy firm Marathon Oil Corp. has agreed to buy privately held PayRock Energy Holdings LLC from venture capital firm EnCap Investments for $888 million. Following this report, Marathon stock closed at $14.48/share on Monday, up 10.03% for the day after opening at $13.85 per share.

Following the closure of the transaction – expected in the third quarter – Marathon will get access to PayRock’s 61,000 net surface areas in the area of Oklahoma known as the Stack, which is considered by some to be one of the best shale oil reservoirs in the U.S. The acreage churns out about 9,000 net barrels of oil equivalent per day. (See More: Marathon Oil Buys PayRock Energy, Stock Jumps 10%.)

2.    Independent energy explorer Pioneer Natural Resources Co. has entered into an agreement to acquire about 28,000 net acres in the Midland Basin. The transaction has been valued at $435 million.

The acreage is spread across Martin, Midland, Upton, Reagan, Glasscock, Andrews, Dawson, Gaines and Howard counties. It has a current net production of about 1,000 barrels of oil equivalent per day, of which about 70% is oil. Almost the entire acreage is held by production.

In concurrence with this acquisition and the company’s improving outlook for oil prices, Pioneer expects to increase its horizontal rig count by five rigs to 17 rigs from 12 rigs in the northern Spraberry/Wolfcamp. The first rig is planned to be added in Sep 2016, while two additional rigs will be added each in Oct and Nov 2016. (See More: Pioneer to Acquire Midland Basin Acreage, Add Rigs in 2Q16.)

3.    The board of directors of energy infrastructure provider Williams Companies Inc. (WMB - Free Report) has offered a special dividend of 10 cents per share. But the catch is that the dividend will only be paid only if Williams merges with Energy Transfer Equity L.P. . Williams’ shareholders will vote for the pending merger on Jun 27. Under the current terms, the merger will fall though if it is not closed by Jun 28, 2016.

The special dividend is likely payable to shareholders of record as of the close of the last business day prior to the consummation of the probable merger. Moreover, the shareholders will have to hold the stock until the completion of the merger.

At the same time, Williams cautioned that if the merger gets closed, the financial benefit or the synergies will be way lower than what was thought last September when Williams agreed to being acquired by Energy Transfer Equity. The company expects the synergies to be $126 million every year by 2020, almost 94% below the prior anticipation of more than $2 billion. (See More: Williams to Shell Out Special Dividend Upon Merger with ETE.)

4.    Oil and gas producer Devon Energy Corp. (DVN - Free Report) announced that it has entered into a definitive agreement to sell its existing Midland Basin non-core assets for $858 million. This did not come as a surprise as the company had given clear indications of selling off its Midland Basin assets. Year to date, the company has announced asset sale of nearly $2.15 billion.

Devon Energy also raised its 2016 capital expenditure guidance by $200 million at both ends to a range of $1.1 billion to $1.3 billion. The company will deploy the additional funds in the Delaware Basin and the Oklahoma STACK play during the third quarter. And finally, Devon also raised its 2016 total production expectation from core assets to the range of 540,000–560,000 barrels of oil equivalent per day by 7,000 barrels of oil equivalent per day. (See More: Devon Energy to Sell More Assets; Ups Capex, Output View.)

5.    Oil giant BP plc (BP - Free Report) , in association with the Egyptian Natural Gas Holding Company (“EGAS”), has given consent for the development of the Atoll Phase One project. The development is an early production scheme (EPS) that is expected to generate about 300 million cubic feet a day gross of gas for the Egyptian domestic gas market.

Recently, BP completed several transportation and processing agreements to ramp up the development of the Atoll field. The field is anticipated to hold 1.5 trillion cubic feet (tcf) of gas and 31 million barrels of condensates. The existing West Harbour gas processing facilities will be responsible for handling onshore processing.

Price Performance

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.

Company

Last Week

Last 6 Months

XOM

+1.85%

+17.94%

CVX

-0.47%

+14.98%

COP

-0.99%

-0.91%

OXY

+1.59%

+15.06%

SLB

-2.45%

+14.19%

RIG

-2.51%

-7.76%

VLO

-3.11%

-27.32%

TSO

-2.76%

-28.68%

Over the course of last week, ‘The Energy Select Sector SPDR’ edged down 0.92% on production recovery concerns. Consequently, investors witnessed selling in some large companies. The worst performer was downstream operator Valero Energy Corp. (VLO - Free Report) that lost 3.11% of its stock price.

Longer-term, over the last 6 months, the sector tracker is up 14.65%. The world’s largest publicly traded oil company Exxon Mobil Corp. was the main beneficiary during this period, experiencing a 17.94% price increase.

What’s Next in the Energy World?

As usual, market participants will be closely tracking the regular weekly releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count. Finally, the U.K. referendum – on whether to remain a member of the European Union – is also likely to affect the markets.

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