Don’t Overlook These Oil & Gas Companies
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Selling assets is just part of the game for oil and gas companies. It helps them focus on their core business and raise funds for the development of other assets to achieve sustainable growth. Moreover, they can use cash received from the asset sales to reduce debt, which increases investor confidence. Let’s take a look at three oil and gas companies selling assets to attain long-term sustainable growth and low debt portfolios. How can investors gain maximum returns by betting on these companies?
Change of focus
Chesapeake Energy (NYSE: CHK) was aggressively investing to increase acreage and its drilling program, which resulted in mounting debt of around $13 billion in the past few years. To tackle its rising debt, the company plans to sell $7 billion of assets this year, out of which it has already sold $3.6 billion.
Power generation plants widely use coal as a raw material for electricity generation. Last year, the U.S. government initiated an environmental plan to reduce the emission of carbon dioxide, and therefore new coal-fired power plants were blocked. Due to this policy, power generation companies will need to install carbon capture technology, which will increase per unit cost of electricity. Moreover, coal emits double the carbon dioxide compared to natural gas, so demand for natural gas is expected to increase since it is a substitute of coal. In addition, natural gas-fired plants cost $1,000 per kilowatt, while coal-fired plants cost up to $3,200 per kilowatt.
As a result of the lower cost of natural gas and government policy, demand for natural gas in the U.S. is expected to rise. Therefore, revenue of the company is expected to surge, as it is second largest producer of natural gas in the U.S. It is estimated that Chesapeake’s revenue from natural gas will increase from $1.94 billion last year to around $4.4 billion by 2015.
Chesapeake's production of oil and natural gas liquids is expected to surge from 48.9 million barrels last year to around 62 million barrels this year. With the increasing production, the company estimates it will generate revenue of around $4.5 billion this year, up 9% year over year.
Murphy Oil (NYSE: MUR) mainly operates in the Gulf of Mexico, Malaysia, and Eagle Ford, with 80% of its production being brent crude. The company holds 80,000 acres in Sabah, offshore Malaysia, and it is expected to invest $1.2 billion in this oilfield, as Malaysia contributes the highest revenue for the company in upstream business. Moreover, Murphy is evaluating the floating LNG in Malaysia, to increase its production. Murphy’s cash flow is negative in Malaysia due to the investments made; however, it is estimated that the company will generate positive cash flow starting next year. With the key development of production in Malaysia, it is expected that the company's overall production will increase from 200 million barrels of oil equivalent per day, or Mboed, this year to 245 Mboed next year.
Last year, Murphy announced to sell some of its assets in the U.K Mungo/Monan field, and spin-off the U.S. downstream business in order to focus on oil exploration and production. With the aim of focusing on upstream for the long term growth, the company will get rid of its downstream businesses. Murphy’s U.K. downstream business declined, and incurred a loss of $4.1 million in the first quarter, compared to a profit of $3 million in the same period of 2012. The spin-off and sale of these assets are expected to be complete by the second half of this year.
Concentrating on core assets
Talisman Energy (NYSE: TLM) is following through with its $7 billion divestiture plan, which focuses on the U.S. and international segments equally. It is expected that it will sell assets worth around $2.5 billion in the upcoming 12 months-18 months. The company’s assets in Duvernay, Ocensa pipeline, Kurdistan, and Papua New Guinea are expected to sell in the near-term. The total value of these assets stands around $7 billion, and it expects to use the sale proceeds to reduce its debt of $4.4 billion. In addition, the company can increase its investments in oil-rich regions like Eagle Ford and the Montney play. It is expected that its debt to equity ratio will decline from 0.48 to 0.46.
The company is shifting its focus to its core assets in North America and Asia-Pacific to match the rising demand in these regions. It has productive assets in Marcellus, Eagle Ford, Western Canada, Montney play, Malay Basin, and Vietnam. The company is expected to generate 85% of its revenue from these regions. Moreover, Montney can play as a lucrative asset, with reserves of 0.6 trillion cubic feet equivalents in this region, and it has over 15,000 barrels of oil in the Vietnam assets. By focusing on these regions, analysts expect an EPS surge from $0.09 last year to $0.27 in 2014.
By focusing on asset sales and natural gas, Chesapeake will grow its revenue. Meanwhile, Murphy will concentrate on oil exploration and production by spinning off the U.S. downstream business and selling assets in the UK. The company has the assets to increase production, which will result in surging revenue. Moreover, cost reduction and increasing production in the core regions will boost Talisman's EPS. Hence, I recommend all three stocks.
Shweta 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!