Oil & Gas Stock Roundup: Sunoco's $3.3B Deal, SeaDrill's Bankruptcy Warning And More

It was a week where oil prices extended their hold over the $50-a-barrel level, while natural gas futures climbed to a 2-month high.

On the news front, fuel supplier Sunoco L.P. (NYSE:SUN) agreed to sell around 1,100 convenience stores and gas stations to Japanese retailer 7-Eleven for $3.3 billion, while offshore driller SeaDrill Ltd. (NYSE:SDRL) saw its stock sink on mounting bankruptcy fears.

Overall, the sector started the second quarter on a positive note. West Texas Intermediate (WTI) crude futures added 3.2% to close at $52.24 per barrel, while natural gas prices rose 2.2% to $3.261 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: ConocoPhillips' $13.3B Asset Sale, Exxon (NYSE:XOM)'s Guyana Oil Find and More.)

Scoring its third gain in 4 weeks, oil prices rallied to their highest level since early March following U.S. military action in Syria. A sudden airstrike of nearly 60 U.S. Tomahawk missiles reportedly bombed an airfield associated with Syrian President Assad, which is blamed for a massive poison gas attack in that country against insurgents of Assad’s regime. Prices were further aided by news of the unplanned production outage of the giant 180,000 barrels-per-day Buzzard field in the North Sea.

However, an unexpected weekly rise in domestic oil supplies to another all-time high and a burgeoning rig count – pointing to the ever-increasing shale drilling activities – kept prices under check.

Meanwhile, natural gas also turned higher after a much smaller-than-expected increase in weekly supplies.

Recap of the Week’s Most Important Stories

1. Downstream petroleum distributor Sunoco L.P. signed a deal with 7- Eleven – a subsidiary of Japan-based retail conglomerate Seven & i Holdings Co. Ltd. – to sell around 1,100 convenience stores and gas stations in Texas and other states for $3.3 billion. Sunoco will also enter into a 15-year agreement with 7-Eleven to sell 2.2 billion gallons of fuel annually.

The transaction, in line with Sunoco's plans to focus on its fuel supply business, is expected to close in the second half of this year. Post the announcement of the deal, shares of the company surged 20%. Sunoco currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The sale will primarily help the partnership to partially pay down $4.51 billion debt thereby making the balance sheet stronger. The proceeds from the sale will also be used for general partnership purposes that include mergers and acquisitions. The sale of gas stations will streamline the portfolio of the partnership leading to a lean, concentrated and a simplified business model.

This apart, the 15-year supply agreement will provide the partnership with regular long-term income thereby improving Sunoco’s financial profile. Sunoco plans to sell another 200 stores and fuel outlets in North and West Texas by the end of the fourth quarter and expand its distribution business through acquisitions (Read more: Sunoco Inks $3.3B Deal with 7-Eleven to Divest 1100 Stores.)

2. International offshore drilling company SeaDrill Ltd. is likely to face the most trying times ahead in the coming months. The company’s shares plunged more than 55% to close at a record low of 74 cents on Apr 4 amid debt woes and bankruptcy talks. The shares further slid by around 7% to 69 cents on Apr 5.

The sharp decline came after the company announced that it has extended the deadline of the restructuring with the lenders yet again by three months till July 31. If SeaDrill does not manage to get the restructuring right within the aforesaid time frame, the company is likely to default and the investors may face steep losses as the shares may lose all its value.

SeaDrill, being one of the worst sufferers of the downturn, carries the heaviest debt burden in the oil rig industry, battling with a total of $14 billion debts and liabilities. The company has been contemplating restructuring under bankruptcy for quite some time now but has not been able to secure a restructuring deal yet. Post the announcement of the extension of the renegotiation period, the company has warned shareholders of severe losses. (Read more: SeaDrill Stock Slumps to a Record Low, Bankruptcy Fears Rise.)

3. Independent energy producer EXCO Resources Inc. (NYSE:XCO) declared that it has inked a definitive agreement with an affiliate of private equity giant Kohlberg Kravis Roberts & Co. to sell its oil and natural gas properties in South Texas. The transaction has an effective date of Jan 1, 2017 and is expected to raise proceeds of about $300 million. Subject to customary closing conditions, the company anticipates the transaction to close in Jun 2017.

The assets to be divested comprise the company's interests in oil and natural gas properties and surface acreage in Zavala, Frio and Dimmit counties in Texas. These properties were purchased for $685 million four years ago, when oil prices were near $100 a barrel and produced about 4,100 barrels of oil equivalent (BOE) per day –90% oil – during Dec 2016.

EXCO Resources plans to utilize the funds to boost drilling and development of its core Haynesville and Bossier shale assets in North Louisiana and East Texas. The remaining proceeds will be utilized for other general corporate purposes. On completion of the sale, the borrowing base under the company's revolving credit agreement will be $100 million. The company's next borrowing base redetermination is slated for November.

4. Anglo Dutch oil giant Royal Dutch Shell (LON:RDSa) plc RDS.A signed a deal to divest its liquefied petroleum gas business in Hong Kong and Macau to oil and LPG supplier, DCC Energy Ltd. For Shell, the deal is part of portfolio optimization strategy and the $30 billion divestment program for 2016—2018.

The $150 million transaction – likely to close in the first quarter of 2018 – will see Shell offload its interest in the LPG business in Hong Kong and Macau, which it had been operating for 60 years. The business supplies infrastructure to fulfill the energy needs of more than 100,000 households.

Shell’s latest asset disposal takes its $30 billion divestment plans past the two-thirds mark and provides the company some uplift in its drive to lower debt following the $50 billion BG Group acquisition. The company sold $5 billion worth assets last year. This year the company divested more than $15 billion worth of assets.

The move is also in sync with Shell's strategy to upgrade and streamline its portfolio as Shell seeks to boost its upstream footprint. The company wants to concentrate on the downstream activities only on the areas which can reap huge profits for the company (Read more: Shell to Divest Hong Kong LPG Business for $150M.)

5. Diversified energy company Unit Corp. (NYSE:UNT) has signed a deal with an undisclosed seller to acquire assets in Western Oklahoma for $57 million in cash and land. Apart from the cash component, Unit Corporation will be transferring 180 acres in McClain County to the seller for the acquisition of the assets. The company will raise the purchase amount through equity offering. The effective date of the acquisition was Jan 1.

Per the terms of the deal, Unit Corp. will acquire 8,300 net acres in the Grady and Caddo Counties, in Hoxbar, OK. The acquisition will also add 47 proved developed producing wells with an estimated average daily production of 1,367 barrels of oil equivalent to the company’s portfolio. The estimated proved reserves of the properties amount to 3.2 million barrels of oil equivalent. The acquisition will add 65 gross potential horizontal drilling locations.

The transaction is in line with the company’s strategy to expand in one of its core areas. The move increases the company’s Hoxbar holdings by 42% to a total of 28,000 net acres and is likely to result in value addition for the stakeholders. (Read more: Unit Corp Inks Agreement to Increase Oklahoma Acreage.)

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.

Over the course of last week, ‘The Energy Select Sector SPDR’ edged up 0.11%. Consequently, investors witnessed buying in most market heavyweights. The best performer was ConocoPhillips (NYSE:COP) – one of the world's largest independent oil producer – whose stock price jumped 9.32%.

Longer-term, over the last 6 months, the sector tracker is essentially unchanged. While the likes of offshore drilling giant Transocean Ltd. (NYSE:RIG) gained a handsome 24.63% during this period, Houston-based energy explorer Occidental Petroleum Corp (NYSE:OXY). was one of the major laggards, experiencing a 12.96% price decline.

What’s Next in the Energy World?

In this holiday-shortened week, market participants will be closely tracking the regular 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.

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