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Big Oil Deals Kick Off the Week

By Toby Shute - Updated Apr 6, 2017 at 1:35PM

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In a seller's market like this one, oil investors should think about lightening up as well.

Hot on the heels of last week's huge oil sands IPO, two significant deals in the U.S. oil patch made headlines this morning.

First, SandRidge Energy (NYSE: SD) announced that it's snapping up Permian oil player Arena Resources (NYSE: ARD) for the equivalent of $40 per share in cash and (mostly) stock. Arena was trading higher at the beginning of the year (when oil prices were lower), but took a big tumble when it announced year-end results. Arena shareholders could perhaps question the timing of this sale -- The Wall Street Journal reports that the companies began discussing a combination in January -- but long-term owners of the stock have certainly done well. Arena shares are up several thousand percent since 2001.

SandRidge, on the other hand, has had a disastrous run as a publicly traded company. The firm used to be heavily natural-gas-weighted, but has more recently begun seeking to refashion itself as a balanced oil and gas player. Today's acquisition follows the $800 million purchase of Permian properties from Forest Oil (NYSE: FST) late last year. SandRidge shares tanked harder on that first deal, so maybe shareholders are warming up to SandRidge's oily new empire. I'm not.

Based on the $1.6 billion transaction price tag, SandRidge valued Arena at around $188,000 per flowing barrel (all oil), which is well into nosebleed territory. The reserve-based metric of $23 and change per proved barrel is less severe, but certainly no bargain considering that 62% of Arena's reserves were undeveloped at year's end. Even with the recently knocked-down price on Arena, SandRidge's transformation isn't coming cheap.

But I have warmed up to the bigger, badder Denbury Resources (NYSE: DNR). When the company acquired Encore Acquisition, I was concerned that it was leveraging up its balance sheet so soon after getting a severe spanking during the credit crisis. Today's news that Denbury is selling off $900 million worth of ex-Encore properties makes me much more comfortable with the enhanced oil player's financial position.

The reserves associated with these discarded properties are 64% natural gas. Converting the 54 million barrels of reserves to a natural gas equivalent 324 billion cubic feet, we see that Denbury sold these non-core assets for $2.78 per thousand cubic feet equivalent (Mcfe). That's a very strong result, and much improved from the sale prices Denbury agreed to on its Barnett shale properties.

Both of today's deals show what a huge premium oil reserves and production are getting in the marketplace today. Investors might want to think about taking profits on hot names like Brigham Exploration (Nasdaq: BEXP) and focusing their energies on natural-gas-focused producers, which are far more likely to be underpriced today.

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