July 3, 2022 [Nasdaq] – It was a week when both oil and natural gas prices registered decreases.
On the news front, energy infrastructure provider Targa Resources TRGP agreed to purchase a Permian-focused natural gas processor for $3.55 billion, while the American multinational ExxonMobil XOM decided to join the expansion of a mega-LNG project in the Gulf state. Developments associated with Diamondback Energy FANG, Chesapeake Energy CHK and Southwestern Energy SWN also made it to the headlines.
Overall, it was a bearish seven-day period for the sector. West Texas Intermediate (WTI) crude futures lost 1.8% to close at $107.62 per barrel, while natural gas prices plunged more than 10% to end at $6.22 per million British thermal units (MMBtu). In particular, the oil and gas markets closed down for the second week in a row.
Coming back to the week ended Jun 24, the negative oil price action could be attributed to investors’ tryst with recessionary fears. In the wake of the central bank’s decision to hike the interest rate by a record-high 75 basis points in June and the possibility of doing the same in July, the commodity continued to be under pressure. Per a large section of market watchers, prolonged supply-chain devastation, stemming from China’s stringent COVID-19 curbs and the termination of the easy-money policy, is likely to slow the economy and, as an extension, crude demand.
Natural gas notched a more severe weekly loss despite healthy demand, primarily due to the possibility of protracted downtime associated with the fire breakout at the Freeport LNG export plant in Texas.
Recap of the Week’s Most-Important Stories
1. Targa Resources, the Houston, TX-based midstream oil and gas company, recently announced that it has signed a definitive agreement for the acquisition of the privately held natural gas processor in the Permian Basin – Lucid Energy Delaware, LLC. A wholly owned subsidiary of Targa will buy Lucid Energy from Riverstone Holdings and Goldman Sachs for cash consideration worth $3.55 billion.
Lucid Energy is considered one of the biggest private pipeline players in Permian and holds around 1,050 miles of natural gas pipelines. Moreover, it offers natural gas gathering, treating and processing services in the Delaware Basin, including about 1.4 billion cubic feet per day of cryogenic natural gas processing capacity in service or under construction predominantly in the Eddy and Lea counties in New Mexico, anchored by long-term, fixed-fee contracts.
Targa’s CEO Matt Meloy mentioned how TRGP’s robust financial position provided the company with the flexibility to consider attractive opportunities to expand its business through acquisitions as witnessed by the ability of the company to finance the purchase of Lucid Energy through available cash and debt. He further stated that this takeover is aligned with Targa’s integrated strategy as it looks to expand and diversify its Permian Basin footprint with Lucid Energy’s presence. (Targa to Buy Lucid Energy in a $3.55B Transaction)
2. Supermajor ExxonMobil recently announced that it has entered into an agreement with QatarEnergy. The accord entails the further development of the North Field East project of Qatar. The agreement, which was declared at QatarEnergy’s headquarters in Doha, will be responsible for expanding the yearly LNG production of Qatar to 110 million tons from 77 million tons. The expansion of the capacity will be conducted by 2026.
Included in the deal terms, ExxonMobil and QatarEnergy will form a new joint venture (JV). In the JV, the companies will become partners, with QatarEnergy having 75% interest and ExxonMobil holding the remaining 25% stake. In the entire North Field East project, the JV will have a 25% ownership interest.
The deal seems lucrative for both the companies since the demand for LNG is mounting, with the commodity being a cleaner burning fuel than coal and easier to transport. (ExxonMobil Agrees to Develop North Field East Project)
3 Diamondback Energy recently announced that it intends to increase capital returns to stockholders. The Midland, TX-based independent energy firm, currently carrying a Zacks Rank #3 (Hold), stated that its board approved a hike in shareholder returns to no less than 75% of free cash flow, beginning in the third quarter, up from its previous commitment of a return of at least 50% of free cash flow.
To begin with, Diamondback stated that it would increase its base annual dividend, starting with the second-quarter payout by 7.1% to $3 per share (75 cents quarterly) from the previous figure of $2.80 annually (70 cents quarterly). This implies a 2.5% annualized dividend yield based on the Jun 17, 2022, closing share price of $122.29.
Moreover, the company mentioned that it would continue to complement the base dividend with variable dividends and stock buybacks. For the second quarter of 2022, FANG plans to stick with its first-quarter base-plus-variable dividend payout of $3.05 per share, implying a 10.0% annualized yield based on the company’s closing share price on Jun 17, 2022.
4 Predominantly natural gas producer Chesapeake Energy recently announced that it will boost its previously declared share buyback program authorization, reflecting a strong focus on returning capital to stockholders.
The repurchase program will get doubled to $2 billion in aggregate value of its common stock and/or warrants from $1 billion through the end of next year. Chesapeake Energy said that 5.4 million shares of its common stock have been repurchased to date under its previously authorized plan at an average price of roughly $89 per share.
The buyback announcement and commitment for base and variable dividends reflect Chesapeake Energy’s strong cash flow generation capabilities, especially in the favorable commodity pricing scenario. CHK boosted its disciplined allocation of capital, reflecting its prime focus on shareholder returns.
5. Another natural gas upstream firm Southwestern Energy recently received authorization from the board of directors for a share repurchase program. SWN believes that with the improvement of the commodity pricing scenario along with successful operational execution and Haynesville integration, the company is well-positioned to generate handsome cashflows. This will aid SWN in returning capital to stockholders and strengthen financials while lowering exposure to debt capital.
The buyback plan entails repurchasing up to $1 billion of outstanding common shares through the end of 2023. Southwestern Energy added that the repurchases will begin immediately and be done from time to time in open market transactions. This reflects Southwestern Energy’s strong commitment to returning capital to shareholders.
Southwestern Energy is also prioritizing reducing debt load to make its balance sheet investment grade. By the end of this year, SWN is focusing on a target leverage ratio of 1.5 to 1.0. By next year-end, Southwestern Energy is planning for a debt range of $3 billion to $3.5 billion.
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