Build a Stronger Portfolio With These Oil and Gas Companies
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global oil and gas exploration and production industry is expected to generate revenue of $4.5 trillion this year with a CAGR of around 1.35% from 2008 to 2013. The companies in this industry are trying hard to improve efficiency and acquire key oil and gas rich areas to raise their production. Three companies are aiming to improve their drilling and exploration techniques in order to enhance their outputs, resulting in better returns.
Furthermore, these companies are selling non-core assets, which will allow them to focus on their main production areas. How will these strategies help the companies perform in the future?
Improved drilling technique and divestiture
In the last quarter, Marathon Oil (NYSE: MRO) reported quarter-over-quarter production growth of 22% to 72,000 barrels of oil equivalent per day, or Boepd, from the Eagle Shale region. The company plans to invest around $2 billion this year in building new pipeline infrastructure and enhancing drilling activities. The new infrastructure will enable it to transport more than 75% of crude production via the pipeline from the current level of 65%, which will result in cost savings of around $1.00-$1.50 per barrel.
In addition, Marathon shifted 80% of drilling activities to the pad drilling technique, which will help in improving its performance by cutting drilling time with year-over-year reduction of 36% to just 18 days. Reduction in drilling time enables it to achieve the target of drilling around 250 new wells in 2013. Marathon’s production in its Eagle Ford region is expected to grow in the range of 7%-10%, year-over-year, in 2013.
Marathon is aiming to sell $1.5 billion- $3 billion in assets over the period of 2011-2013. The company has already achieved the lower-end of this target and is continuously looking across its portfolio for further optimization. Therefore, in June 2013, it announced to sell 10% working interest of its non-core Angola Block 31 to Sonangol Sinopec International for $1.5 billion.
This deal is expected to close by the end of the fourth quarter of 2013. On completion of this deal, it will have achieved asset sales of nearly $2.9 billion. The company is planning to use these proceeds for general corporate purposes and for its share buyback program of nearly $5 billion this year, which will strengthen its balance sheet.
It is expected that the company can improve its EPS to $2.82 this year and $3.35 next year from $2.23 last year.
Asset sales to fund new spending
Chesapeake Energy (NYSE: CHK) is the second largest gas producing company in the U.S. Due to aggressively focusing on expanding its acreage and drilling activities, its spending exceeded cash flows, resulting in a debt burden of $12 billion.
In order to reduce its debt and to fund spending, Chesapeake plans to sell its non-core assets. Additionally, to overcome the adverse impact of falling natural gas prices, it has agreed to sell its 55,000 acres in the Northern Eagle Ford Shale and non-operated 9,600 acre assets in the Haynesville Shale region to EXCO Resources (NYSE: XCO) for $1 billion. With this asset sale, the company will end-up with funds totaling around $3.6 billion year-to-date from asset sales, which will enable Chesapeake to cover is full expansion budget of around $7 billion for 2013.
The company may utilize around 80% of these proceeds for drilling new wells in other lucrative oil-rich fields, especially in the Eagle Ford region, compared to 50% in the last three years, which would allow it to offset losses from falling gas prices. By selling-off its non-core assets and exploring oil-rich fields, Chesapeake is in a better position to increase its production approximately 28% year over year to around 40 million barrels of oil.
EXCO Resources is consistently grabbing underlying growth opportunities in the Eagle Ford Shale and Haynesville Shale formation. Therefore, it acquired the producing and undeveloped oil and gas assets in these regions from Chesapeake. The company projects spending of $273 million for 2013, allowing it to add a combined 355 drilling locations in both these regions. It is expected that these acquisitions will provide EXCO a leading edge over its competitors. Moreover, its expansion platform enables it to deliver immediate production and reserve additions.
This will allow EXCO to use its technical expertise in drilling activities and timely completion of its exploration projects, resulting higher exploration efficiency. Through these acquisitions, it is expected that EXCO should increase its production by 6,100 boepd and 114 million cubic feet equivalent per day or cfepd of natural gas in 2013 in these regions.
In July 2013, Chesapeake signed the Mississippi Lime joint venture with China's Sinopec International Petroleum Exploration and Production. In this deal, Chesapeake sold its 50% stake for $1.02 billion. Both companies will share all future exploration and development costs and Chesapeake, as the operator, will manage the leasing, drilling, operational, and marketing activities. By signing this deal, it is expected that Chesapeake will efficiently develop and enhance production from this asset in the future. Further, this JV will enable it to raise its total revenue to around $14 billion this year from $12.32 billion last year.
To grow and enhance their footprint, the oil and gas companies are looking to expand their presence by focusing on core areas and enhancing their drilling activities. Marathon Oil is installing new infrastructure with improved pad drilling technique, and the JV with Sinopec will help the company raise production and improve its EPS. Chesapeake’s sale of non-core assets will enable it to reduce its debt burden and fund expansion in oil-rich areas. EXCO acquired acreage in Eagle Ford and Haynesville shale region to enhance its footprint in these regions and raise its production level.
Therefore, I recommend buying these stocks.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has the following options: long January 2014 $30 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!