Crude prices rallied to a five-week high on positive U.S. economic data and the continued Ukraine impasse, while natural gas continued its downtrend amid another above-consensus storage build.
Among the newsmakers, refiner Marathon Petroleum Corp. (MPC) agreed to buy the retail operations of energy producer Hess Corp. (HES) for $2.87 billion, while European oil giant Royal Dutch Shell plc (RDS.A) decided to cancel its scrip dividend program.
Crude Oil:
Crude prices got a boost from the latest manufacturing and housing numbers, providing further evidence that the U.S. economy is coming out of its winter freeze. This has fueled hopes for robust fuel and energy demand in the world’s biggest oil consumer.
The positive momentum was further propelled by a significantly higher-than-expected decrease in oil inventories and the approaching summer driving season that would provide a fillip to gasoline consumption. Geopolitical forces too played their part in supporting crude prices, with news of renewed tension in Libya, and continued confrontation between Moscow and the West that threatens to derail hydrocarbon supplies from Russia.
However, the bulls were somewhat offset by a bigger-than-expected jump in U.S. jobless claims, while domestic production still remains in record territory. Concerns over Chinese demand slowdown and Euro-zone’s economic growth has also been a drag on prices.
As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil settled at around $104.35 per barrel, gaining 2.0% for the week.
Natural Gas:
Natural gas extended losses slightly from the previous two weeks, spooked by a bearish supply data. To a large extent, this was offset by expectations of an uptick in electric power demand with the imminent arrival of summer months.
The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 106 billion cubic feet (Bcf) for the week ended May 16, above the guided range (of 101–105 Bcf build). Moreover, the latest build – the seventh on the trot and the fifth successive above consensus injection – went a long way in easing fears about the timely replenishment of the inventories ahead of the next heating season, starting from November.
However, the commodity recouped most of the losses later in the week, as traders focused on the impending arrival of summertime mercury readings that is likely to boost natural gas’ demand for air conditioning.
Influenced by these factors, natural gas prices ended Friday at $4.41 per million Btu (MMBtu), down a mere 0.2% over the week.
Energy Week That Was:
The week’s energy coverage was dominated by the following news:
Marathon Petroleum to Buy Hess Retail Unit for $2.9B
Ohio-based independent oil refiner and marketer Marathon Petroleum Corp.’s Speedway LLC unit has agreed to acquire the retail arm (including gas stations and pipelines) of integrated energy firm Hess Corp. for about $2.87 billion in cash, working capital and capital leases. The transaction, which is likely to close by the third quarter, will significantly expand Speedway’s fuel trading operations in the U.S. east and southeast coast. On the other hand, Hess will also benefit from the sale by divesting its downstream properties to focus primarily on upstream activities, apart from using the proceeds to buy back shares.
Shell Terminates Scrip Dividend Program
European oil giant Royal Dutch Shell plc announced that it will stop the scrip dividend program – paying dividends to shareholders in the form of stock – from the current quarter, focusing instead on share buybacks and cash payments. Shell believes that by 2015, the share buybacks would offset the dilution that has resulted from the company’s scrip dividend program. Moreover, the move would put an end to Shell’s dual share structure that resulted in increased costs for the company as per the Dutch tax rule, with additional buybacks – considered a type of payout – being taxed.
BP to Plead Supreme Court for Spillover Case Review
British energy giant BP plc (BP) has announced that it will appeal in the U.S. Supreme Court to review a court order on a settlement tied to its 2010 Gulf of Mexico oil spill. The company will appeal for a ruling by a lower court concerning the quantum of damage payments to businesses affected by the spill. On May 19, the 5th U.S. Circuit Court of Appeals – in an 8 to 5 vote – denied BP’s request for a rehearing on its settlement dispute before the entire court. The bone of contention per the company is that the lower court ruling will force it to pay for economic damages to business without the claimants having to prove their losses resulted from the spill.
Encana Raises C$1.46B via PrairieSky IPO
Canadian natural gas producer Encana Corp. (ECA) raised C$1.46 billion by issuing 52,000,000 common shares in the initial public offering (IPO) of PrairieSky Royalty Ltd. at C$28 each. PrairieSky will be the newly formed company, after Encana spins off its gas and oil resources in Western Canada. Post separation, Encana will retain 60% ownership in PrairieSky, an energy royalty company controlling about 5.2 million acres of oil and gas properties across central and southern Alberta.
Exxon Mobil, Linn Energy Strike Asset Swap Deal
Domestic energy explorer Linn Energy LLC (LINE) agreed to exchange acreage with a unit of supermajor Exxon Mobil Corp. (XOM). Per the non-monetary asset swap deal, Exxon Mobil will add some 25,000 net acres to its Texas Midland Basin properties managed by the XTO Energy subsidiary. In return, Linn Energy will get a part of XTO’s stake in the Hugoton gas field in Kansas and Oklahoma. In particular, the transaction is seen as a positive for Linn Energy, as it will add about 85 million natural gas-equivalent cubic feet (80% gas) to the company’s daily production.
Performance Chart of Some Major Companies:
The following table shows the price movement of the major oil and gas players over the past 5 days and during the last 6 months.
|
Ticker |
Last 5 Day’s Performance |
6 month performance |
|
XOM |
+0.69% |
+7.48% |
|
CVX |
+0.01% |
+0.48% |
|
COP |
+0.41% |
+7.54% |
|
OXY |
+0.99% |
-0.68% |
|
SLB |
+1.96% |
+13.34% |
|
RIG |
+2.16% |
-15.58% |
|
VLO |
-0.66% |
+22.98% |
|
TSO |
-1.67% |
-4.76% |
Other Headline News on Energy:
Sanchez Energy Soars on Acquisition
Houston-based oil and gas company Sanchez Energy Corp. spiked around 9% after it entered into an agreement to buy operated assets in South Texas’ Eagle Ford from energy behemoth Royal Dutch Shell plc for $639 million in cash. The to-be-bought properties – spread across 106,000 net acres in Dimmit, LaSalle, and Webb Counties, TX – include about 176 operated producing wells and other related facilities. The transaction, which is expected to close toward the end of the current quarter, will add 24,000 oil-equivalent barrels (60% oil) to Sanchez Energy’s daily production.
Williams Companies Ups Div 20% as Promised
North American energy firm Williams Companies Inc. increased its regular dividend to 42.50 cents per share ($1.70 annualized), up 20.6% from 35.25 cents in the prior-year quarter. The new dividend, to be paid on Jun 30, also marks sequential growth of 5.6%. This increase in payout is in accordance with the company’s recent announcement of an expectation of annual dividend growth of 20% through 2016. If Williams Companies succeeds in achieving its projected target, the annual payout in 2016 would reach to $2.54 per share.
Hercules Offshore Gets $420M Drilling Contract
Contract drilling services provider Hercules Offshore Inc. announced a drilling agreement with Danish oil and gas company Maersk Oil North Sea UK Ltd. to deploy a newbuild jackup rig to develop the latter’s Culzean Field in the Central North Sea. The 5-year contract – valued at around $420 million – is expected to be operational from the middle of 2016. Hercules Offshore would be the owner and operator of the newbuild.
This Week’s Outlook:
Apart from the usual releases in this holiday shortened week – the U.S. government data on oil and natural gas – market participants will be closely tracking Thursday’s crucial GDP report. Energy traders will also be focusing on developments in Ukraine and Libya.
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