It was a week where energy stocks were hammered following the OPEC oil cartel’s refusal to curb output and let the commodity slide. Apart from that, the top story came from Weatherford International plc’s (WFT) announcement to sell some of its businesses to Warren Buffett’s Berkshire Hathaway Inc.
Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures slumped 13.5% to close at $66.15 per barrel, while natural gas prices fell 4.2% to $4.09 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Approval for Kinder Morgan, Rejection for Keystone.)
Oil prices returned to their losing ways after just a week’s relief and fell to their lowest level since 2009. The crash was in reaction to the decision by the international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – to maintain daily crude production level at the preset 30 million barrels, defying expectations of an output cut in response to the current supply glut.
Natural gas also fared badly, weighed down by expectations of weak heating demand across the U.S. with forecasts of mild weather during the first two weeks of December.
Recap of the Week’s Most Important Stories
1. Leading oilfield services company Weatherford International plc announced that it would divest its Engineered Chemistry and Integrity drilling fluids business to Lubrizol Corp., a subsidiary of Berkshire Hathaway Inc. The transaction is expected to close before year-end 2014.
Per the agreement, Weatherford would pocket $750 million in cash along with a potential $75 million for an earnout that is tied to the post-closing performance of the businesses. Proceeds from the deal would be used to bring down Weatherford’s outstanding debt levels.
2. Marathon Oil KDV B.V., an affiliate of energy explorer Marathon Oil Corp. (MRO), has made an oil and natural gas discovery in the Kurdistan region of Iraq. The find – in the Harir Block – was made through the exploratory well, Jisik-1. The well is located 40 miles northeast of Erbil and was drilled to a depth of about 15,000 feet.
Marathon Oil has 45% stake in the Harir block and also acts as its operator. French behemoth TOTAL S.A. has 35% working interest in the block while the remaining stake is held by the Kurdistan Regional Government.
3. Shares of offshore drilling contractor SeaDrill Ltd. (SDRL) plunged 23% on Wednesday as the company’s board of directors decided to suspend dividend payments. Market softness owing to drastic decline in oil prices for most of the third quarter, along with falling dayrates and heightened competition due to oversupply of rigs have weighed heavily on the company’s earnings. The considerable profit decline has compelled the board to disappoint investors by calling off dividend payouts.
What its investors disfavored is that the company did not live up to its previous assurance of keeping dividend secure till the end of 2015. SeaDrill did not to keep its word and has lost the trust of its shareholders for sure. (See More: SeaDrill Shares Plunge 23% After Board Suspends Dividend.)
4. Houston, TX-based oil and gas pipeline company Kinder Morgan, Inc. (KMI) announced that it has completed its acquisition of its three subsidiaries – Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC and El Paso Pipeline Partners, L.P. The combined entity represents the largest energy infrastructure company in North America and the third-largest energy company globally.
The $76 billion merger transaction was initially announced on Aug 10, and got shareholder and unitholders’ approval at special meetings held by the parent company and the three partnerships on Nov 20. Stakeholders overwhelmingly approved all proposals related to the merger. In all the four special meetings, more than 95% of the votes cast were in favor of the merger. (See More: Kinder Morgan Forms Largest North American Midstream Firm.)
5. Canadian energy transporter Enbridge Inc. (ENB) announced that it has acquired an 80% interest in a portfolio of two wind farms in the U.S. from European power and gas company, E.ON for approximately $650 million.
Per the transaction, Enbridge acquired interests in the 203-megawatt (MW) Magic Valley 1 wind farm near Harligen, TX and the 202-MW Wildcat 1 wind farm near Elwood, IN. Both farms are operational and came into service in 2012. These are located in areas with favorable wind regimes and when combined, provide enough clean power to more than 120,000 households. Under the terms of the agreement, E.ON retained a 20% interest and remains the operator of the wind farms. (See More: Enbridge Acquires Interest in E.ON's Wind Portfolio.)
Price Performance
The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.
|
Company |
Last Week |
Last 6 Months |
|
XOM |
-4.19% |
-7.59% |
|
CVX |
-5.55% |
-8.58% |
|
COP |
-8.15% |
-14.73% |
|
OXY |
-6.66% |
-17.01% |
|
SLB |
-14.41% |
-18.35% |
|
RIG |
-23.17% |
-51.97% |
|
VLO |
-3.19% |
-13.47% |
|
TSO |
-3.63% |
+34.29% |
Energy investors witnessed bloodbath last week, led by heavy selling in major companies following OPEC’s decision not to cut production. Of the lot, the biggest loser was offshore driller Transocean Ltd. (RIG), which fell a whopping 23.2% during the period. With oil prices down 40% since June and energy companies cutting costs by scaling back drilling, the likes of Transocean is having to deal with less orders.
Over the last 6 months, refiner Tesoro Corp. (TSO) has been the leader of the pack with its shares advancing 34.3%. Investors have rewarded the company for its continued focus on shareholder returns. On the other hand, Transocean was again the laggard, as it witnessed a 52% price decline over the same time frame on the back of rig oversupply that has led the industry into a cyclical downturn.
What’s Next in the Energy World?
Apart from the usual releases in this week – the U.S. government data on oil and natural gas – market participants will be closely tracking a series of crucial economic reports, including those on manufacturing, services, construction spending and unemployment.
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