The energy sector has seen a number of recent restructurings as some diversified energy companies have split up through either a spinoff or initial public offering of a particular business segment. These actions have been motivated by management teams that believe that a singular focus is the best way to achieve shareholder value. Sometimes this is also accompanied by investor pressure from the sidelines.
TUTORIAL: The Oil Services Industry Handbook
Marathon Oil (NYSE:MRO) recently spun off the company's refining business as Marathon Petroleum Corp. (NYSE:MPC) and will now operate exclusively as an exploration and production company. Williams (NYSE:WMB) also announced a similar restructurings and will sell part of the company's exploration and production operations through an initial public offering later in 2011. (The initial valuation of an IPO can determine the success or failure of a specific stock. For more, see How An IPO Is Valued.)
This spasm of reorganizations has left a dwindling number of energy companies that are candidates for future restructurings. Unit Corp. (NYSE:UNT) and MDU Resources (NYSE:MDU) are two energy companies that have operations in disparate parts of the energy complex and might be suitable for a restructuring.
Unit Corp operates three distinct businesses in the energy sector. The company has an exploration and production business focused on the onshore United States, a contract drilling segment and a midstream operation that gathers, processes and transports natural gas and natural gas liquids.
The exploration and production segment of Unit Corp is active in Texas, New Mexico, Oklahoma and Louisiana and reported proved reserves of 104 million barrels of oil equivalent (BOE) at the end of 2010.
The contract drilling segment owns 126 land rigs, including five new builds. In the first quarter of 2011, Unit Corp reported only a 58% utilization rate for this fleet. The company also uses some of the rigs in its own exploration and production operations.
A possible indication of the importance that investors and possibly management puts on the various businesses of Unit Corp can be seen in the company's latest investment presentation. Unit Corp devotes nine pages to its upstream exploration and production operations, compared to only four pages for the contract drilling segment and two pages for the midstream business. (Oil and gas investments can provide unmatched deduction potential for accredited investors. For more, see Oil: A Big Investment With Big Tax Breaks.)
Another diversified energy company that might one day find itself under pressure by investors to split up is MDU Resources. The company operates an exploration and production business, an aggregates and construction business and also owns seven regulated utilities that are involved in electricity, gas distribution or pipelines operations.
MDU Resources operates its exploration and production business under the name Fidelity Exploration & Production Company. The company is active in various plays throughout the Rocky Mountain and Midcontinent area, including the Bakken and Niobrara formations.
MDU Resources reported proved reserves of 646 Bcfe at the end of 2010, with 69% of the reserves composed of natural gas and the balance of crude oil. The company plans to spend $3.5 billion in capital from 2011 to 2015 on all its businesses, with the majority spent on exploration and development of oil and gas assets.
The Bottom Line
Investors that are looking for a restructuring play in the energy sector might want to take a look at Unit Corp or MDU Resources as both companies operate disparate businesses in the energy sector, and might one day be inclined towards a separation of the company's business segments. (For related reading, see A Guide To Investing In Oil Markets.)
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