You Should Buy These 3 Oil And Gas Sweet Spots

 |  Includes: BBEPQ, COG, EVEP
by: Fusion Research

The global demand for energy continues to grow, which is prompting oil and gas companies to look for new sources in highly productive areas. Three companies are selling and acquiring assets to increase their production and enhance their bottom lines. With the discovery of new oil reserves and rising production levels, these companies stand to gain in the coming years. How will these developments benefit investors?

Sale supports mid-stream spending

EV Energy Partners (EVEP) has revised its strategy to best capitalize on its Utica acreage. Instead of selling Utica in one go, it has now decided to divide it into three separate packages: wet gas acreage, volatile oil window and non-operated acreage. Wet gas is a gas found during oil exploration, in which varying amounts of liquid are present.

In the short term, EV Energy will sell its wet gas acreage assets because these assets are getting fair valuation. It will use the proceeds from the sale of its wet acreage to enhance the value of its Utica midstream joint venture. The wet gas acreage constitutes around 20,000 acres, and assuming a price of $10,000 per acre, the sale of wet gas acreage is expected to bring around $200 million.

EV Energy is also focusing on the volatile oil window for long-term growth. It is looking for a joint venture to carry the development cost of a portion of the wells for its volatile oil window region in Utica assets. This region contains volatile oil, a type of crude oil, which evaporates very quickly. This decision was due to low bids on its asset from buyers because of the risk attached with the oil exploration in a volatile window.

Through a strong partner, experienced in developing shale plays, the company hopes to optimize the completion design. It has started negotiation with oil and service companies that have technical expertise in complex shale. The volatile oil window consists of around 80,000 acres and at a current valuation of $4,000 per acre, it is expected to fetch $320 million. This joint venture will take one to two years for shale development and would ultimately drive up the per-acre value in the market. The proceeds from the sale will help EV Energy invest in its more productive assets, which will drive up the earnings in coming years. The EPS is expected to increase to $0.12 in 2013 from -$0.38 in 2012.


Last month, BreitBurn Energy Partners (BBEP) completed the acquisition of oil and gas assets in the Oklahoma Panhandle from Whiting Petroleum (WLL) for approximately $846 million. The acquired assets hold undeveloped oil reserves with high predictable production, which it can exploit with enhanced oil recovery, or EOR, projects. Also, it will increase BreitBurn's total production capacity by 28% from the first quarter of fiscal year 2013. BreitBurn will add around $133 million of EBITDA annually in 2013 from this acquisition.

The acquisition of Oklahoma Panhandle territory provides BreitBurn with improved production capacity and an increased revenue stream. The company has estimated EBITDA of $235 million-$245 million and distributable cash flow of $135-$145 million in the second half of 2013.The increase in cash flow will support its annual dividend distribution growth target of 5% in 2013. In addition, BreitBurn Energy announced a 4% year-over-year increase dividend of $0.48 per unit, or $1.92 on an annualized basis in the second quarter of 2013.The acquisition will help BreitBurn achieve a positive EPS of $0.76 in 2013 from -$0.56 in 2012.

Rising production of Marcellus Shale

Cabot Oil & Gas (COG) is in oil and gas exploitation and exploration, and its principal areas lie in the Marcellus Shale. The company is planning to introduce a central compression station in the Marcellus Shale in the second half of this year. The new station will remove all supply problems and allow efficient transportation of oil. The company will increase its oil production from the Marcellus once this station comes into operation in the second half of 2013.

The total capacity from Marcellus is planned to increase from 1.4 billion cubic feet per day, or bcfpd, to 2 bcfpd in 2013 and 2.9 bcfpd in 2014. In addition, the company is planning to bring new compression and dehydration capacity by the end of 2013, which will allow Cabot to add a sixth rig in this region by the second half of 2013.

Cabot is making investments and is increasing production capacity of its Marmaton formation. It completed five wells and extracted 230 million barrels of oil equivalent, or mboe, in the first quarter of 2013. It is considering sale of its Marmaton assets in the future and intends to use the proceeds toward the higher-return Marcellus Shale.

The Marcellus Shale is a highly productive reserve and is the largest source of natural gas in the U.S., contributing 78% of the company's total production in 2012. Cabot has around 70,000 net acres in Marmaton formation in Oklahoma, and Texas. The asset is expected to fetch Cabot $140 million at a price of $2,000 per acre in the future. This valuation will cause EPS accretion of around $0.70 per share at the time of sale. The overall EPS is expected to increase from $0.33 in 2012, to $0.80 in 2013.


All these oil and gas companies are acquiring or investing in productive assets to increase their earnings. Both BreitBurn Energy and EV Energy are expected to take their EPS in positive figures in 2014, with BreitBurn Energy showing a massive EPS growth of 235%.

The acquisition in the Oklahoma Panhandle will not only provide long-term value to BreitBurn, but also to investors through dividend distribution. Cabot is concentrating on its Macellus Shale and is increasing its production facility. It is also looking to cash in its Marmaton assets to invest in Marcellus Shale. Lastly, the sales of Utica assets will generate capital to invest in its mid-stream assets for EV Energy.

These oil and gas companies are poised for long-term growth, and are worth an investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.