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Oil & Gas Stock Roundup: Diamondback's Permian JV, HollyFrontier's Buyback & More

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It was a week where oil prices rose to their highest settlement since July 20 but natural gas futures ended flat.

On the news front, Permian pure-play Diamondback Energy, Inc. (FANG - Free Report) teamed up with global private equity firm The Carlyle Group LP for the development of its assets in the region, while refiner HollyFrontier Corporation (HFC - Free Report) announced a $1 billion share buyback plan.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures rose 1.8% to close at $68.99 per barrel, natural gas prices ended Friday at 2.767 per million Btu (MMBtu) - little changed over the course of the week. (See the last ‘Oil & Gas Stock Roundup’ here: Transocean's Acquisition, Chevron's Legal Victory & More)

The U.S. crude benchmark gained for the third time in four weeks after the Energy Department's inventory release showed that stockpiles recorded a large draw on the back of strong refinery throughput and lower imports. Worries that Washington’s looming sanctions against Iran will significantly tighten supplies also contributed to the gains.

Meanwhile, natural gas prices were essentially unmoved last week. The U.S. Energy Department's weekly inventory release showed a marginally smaller-than-expected increase in natural gas supplies. Despite the headline beat and a growing storage deficit, strong production and the expected power loss from Hurricane Florence weighed on the fuel’s price.

Recap of the Week’s Most Important Stories

1.    While the lack of takeaway capacity in the prolific Permian play could mar the region’s growth prospects in the near future, Diamondback Energy seems to be rather unfrazzled by this dilemma. The Texas-based Permian pure-play has been strategically working to further boost its presence in the region. While many producers have been reducing their spending levels in Permian and shifting their focus to other shale plays, Diamondback does not intend to re-evaluate its strategies. The company believes that once the pipeline issues get sorted after a year or so, the country’s chief oil growth engine, the Permian Basin, will surely offer handsome rewards to the firm.

Recently, Diamondback announced that it has teamed up with investment management company The Carlyle Group LP to form a joint venture (JV) for developing the former’s Permian assets.

The companies will jointly invest $620 million for the development of oil and gas assets in the San Pedro area of Pecos County, wherein Diamondback owns majority of its holdings. Notably, Carlyle will fund 85% of the development fund program. After achieving some performance milestones under the program, Carlyle's working interests will largely be transferred to Diamondback. (Read more: Diamondback and Carlyle Form JV to Develop Permian Assets)

2.    HollyFrontier Corporation recently declared that its board has approved a new share buyback program, authorizing it to repurchase shares worth $1 billion. The new program is designed to replace all existing ones, which had only $43.6 million left. Starting from the third quarter, the company had repurchased around 1.2 million shares until Sep 13.

Per the authorization, Dallas, TX-based HollyFrontier is allowed to perform repurchases through open-market buybacks and privately-negotiated agreements.

Notably, the latest buyback program constitutes 8.1% of HollyFrontier’s market cap. The move reflects its dedication to enhance shareholder value through returning its surplus free cash flow to its shareholders. In the trailing 12 months, the company’s free cash flow surged 35.6% to $923 million. The company reached its current form following the 2011 merger between Holly Corp. and Frontier Oil. Since then, the company has returned around $4.7 billion to its shareholders, in cash. (Read more: HollyFrontier to Reward Shareholders With $1B Share Buyback)

3.    Pioneer Natural Resources Company (PXD - Free Report) recently agreed to buy a stake in Lamesa, TX sand reserves of U.S. Silica Holdings, Inc. Under the terms of the long-term sand supply deal, Pioneer Natural will receive processed sand from the reserves for 15 long years. The financial details of the deal are yet to be disclosed.

The sand from Lamesa will reach Pioneer Natural’s oil and natural gas wells in the prolific Permian Basin, for usage in hydraulic fracturing. Its Midland Basin acreage will likely benefit from the “low-cost West Texas sand” for a significant period of time. The company expects the deal to reduce its sand costs by 50% and further lead to a sustainable decline in overall well expenses from the next year. The move will help the Zacks Rank #3 (Hold) company earn more profit, courtesy of rising output from the basin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The sand reserves of U.S. Silica are situated around 60 miles north of Midland, where it expects to produce about six million tons of fine grade 100 mesh per annum along with 40/70 mesh sand. Output at the site is expected to commence in the last quarter of 2018. The timeline for the first delivery to Pioneer Natural is projected around first quarter of 2019. Pioneer Natural is expected to obtain around 1.4 million tons of initial supply, which will likely grow to 2 million tons in 2020. (Read more: Pioneer Natural to Buy U.S. Silica's Sand for Permian Wells)

4.    Matador Resources Company (MTDR - Free Report) purchased 8,400 gross (8,400 net) acres in Lea and Eddy Counties, New Mexico, in the Bureau of Land Management (“BLM”) New Mexico Oil and Gas Lease Sale held on Sep 5 and 6, 2018.

The total purchase consideration was about $387 million or a weighted average cost of around $46,000 per net acre. The company expects to fund these acreage purchases with cash on hand and borrowings under its revolving credit facility, which had no amount outstanding as of Sep 12, 2018. If required, the company may sell portions or all of its non-Delaware Basin assets to finance this acquisition.

The assets comprise about 2,800 gross per net acres in the Stateline area, 4,800 gross per net acres in the Antelope Ridge asset area, 400 gross per net acres in the Arrowhead asset area and 400 gross per net acres in the Twin Lakes asset area. All these take Matador’s total leasehold and mineral position in the Delaware Basin to about 217,400 gross acres or 123,800 net acres (pro forma at Aug 1, 2018). (Read more: Matador Expands Footprint in Delaware Through Purchases)

5.    Targa Resources Corporation (TRGP - Free Report) recently inked a deal to offload its petroleum terminals and crude oil storage facilities in Baltimore and Tacoma. Houston-based Targa will divest these properties to ArcLight Capital Partners, LLC, which is headquartered in Boston, for $160 million. Subject to satisfactory closing conditions, the deal is set for culmination in the fourth quarter of 2018. Targa intends to utilize the proceeds from the divestment to finance its pipeline projects that are underway.

Notably in August, Targa had announced its intention to join hands with multiple partners including NextEra Energy, Inc. and MPLX LP — the midstream arm of Marathon Petroleum Corporation — and some private equity investors for building a 600-mile natural gas pipeline. The Whistler pipeline, with a transportation capacity of around 2 billion cubic feet of gas per day, will transport gas from the Permian Basin to Corpus Christi and Houston regions. While the financials of the project have been kept under wraps, the pipeline is likely to become functional in late 2020.

Pipeline constraints in the prolific Permian play have opened a window of opportunity for the midstream companies to build new projects or expand the existing ones. Record levels of oil output have prompted a race among the midstream operators to invest in oil pipelines. There has also been an enormous growth in gas production, which calls for new gas pipelines to ensure a facile flow of natural gas from the Permian region. (Read more: Targa to Sell Petroleum Terminals to Fund Pipeline Projects)

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

+1.3%

+12.5%

CVX

+2.4%

+3.2%

COP

+4.7%

+35.7%

OXY

+1.2%

+21.9%

SLB

+2.6%

-7%

RIG

+8.3%

+20.2%

VLO

+1.8%

+24.2%

MPC

+2.2%

+21.1%

Reflecting the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +2% return last week. The best performer was offshore drilling powerhouse Transocean Ltd. (RIG - Free Report) whose stock jumped 8.3%.  

Longer-term, over six months, the sector tracker is up 12.2%. Large independent producer ConocoPhillips (COP - Free Report) is far and away the major gainer during this period, experiencing a 35.7% 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.

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