It was a week where energy stocks were hammered following the OPEC oil cartel’s refusal to curb output and let the commodity slide, while natural gas futures dipped on weather-related demand concerns.
On the news front, Devon Energy Corp. DVN – and its joint partnership EnLink Midstream Partners L.P. – announced plans to acquire oil assets worth $4.05 billion.
Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures dived 4.2% to close at $39.97 per barrel, while natural gas prices fell 1.2% to $2.186 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell, Halliburton Aim to Clear Regulatory Hurdles.)
Oil prices slumped in reaction to the decision by the international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – to set a daily output ceiling of approximately 31.5 million barrels (the previous production cap was officially 30 million barrels). The group’s move defied expectations of an output cut in response to the prevailing supply glut.
Natural gas also fared badly despite a bullish inventory report that showed the season’s first withdrawal. The heating fuel was weighed down by predictions of tepid early-December demand due to mild weather.
Recap of the Week’s Most Important Stories
1. Independent energy producer Devon Energy Corp. inked three independent deals, all designed to sharpen the company’s focus in the potential emerging oil plays, amid the global glut in crude prices.
Confirming market rumors, Devon Energy has acquired 80,000 net acres in the Anadarko Basin STACK play from Felix Energy LLC, a smaller operator in the oil and gas space, for nearly $1.9 billion.
Devon Energy has also announced the acquisition of 253,000 net acres in Powder River Basin, south of its existing assets in Wyoming, having a production capacity of 7,000 barrels of oil equivalent per day (‘BOED”), of which oil accounts for 85%. Devon is shelling out $600 million to close this deal.
In a separate transaction, Devon Energy’s joint partnership unit, EnLink Midstream, has entered into an agreement to acquire its peer Tall Oak Midstream for $1.55 billion. Tall Oak has midstream gathering and processing assets in the core areas of the STACK oil play, the STACK natural gas system and STACK crude oil system, which are expected to commence operations in 2016.
2. Europe’s largest oil company Royal Dutch Shell plc RDS.A has received the final Australian approval to proceed with the acquisition of BG Group plc − a leading upstream energy player in the UK. The Foreign Investment Review Board of Australia okayed the deal with which Shell crossed an important milestone.
During the first half of this year, the integrated energy major entered into an agreement to purchase BG Group plc for a total consideration of $70 billion – including both cash and equity payments. This is the biggest merger in the energy space in a decade. If everything falls in place, the transaction will likely be completed by early 2016 (See More: Shell Gets Australian Regulatory Nod for $70B BG Takeover).
3. Schlumberger Ltd. SLB is expected to lay off thousands of more personnel before the year ends, per a Form 8-K filing with the U.S. Securities and Exchange Commission on Dec 1. The oilfield services behemoth is anticipated to incur pre-tax restructuring charges of $350 million from further retrenchment of its workforce. However, the form does not specify the exact number of job cuts.
Per the SEC filing, Schlumberger expects a longer period of low oil prices that would further reduce drilling activity. The reshuffling may result in termination of back office functions that comes with Schlumberger's proposed acquisition of Houston-based Cameron International for $14.8 billion. (See More: Schlumberger Likely to Retrench More Jobs by 4Q15.)
4. Downstream operator Marathon Petroleum Corp. MPC unveiled its capital investment plan for 2016. During the year, the company will likely invest $4.2 billion.
Of the total amount, Marathon Petroleum is expected to spend $1.5 billion on the refining and marketing business. For the Speedway unit – representing the retail operation − almost $400 million will be invested, while the company’s pipeline transportation operation will see an infusion of $2.2 billion. (See More: Marathon Petroleum Discloses $4.2B as 2016 Capital Budget.)
5. Offshore drilling giant Transocean Ltd. RIG has entered into a deal with Husky Oil Operations Ltd. for its semisubmersible rig Henry Goodrich.
Per the agreement, Husky Oil will likely use the rig – capable of working in a harsh environment − for two years off the coast of Canada. The rig – anticipated to be operational by the second quarter of 2016 – is likely to see a dayrate of $275,000. Most importantly, the award will add $200 million to Transocean’s backlog.
It is to be noted that the rig’s current dayrate is lower that its previous rate which was in the range of $347,000–$476,000. The company added that its contract backlog as of Dec 6, 2015 was $16.8 billion.
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 |
-5.94% |
-9.49% |
|
CVX |
-4.52% |
-13.09% |
|
COP |
-9.88% |
-22.77% |
|
OXY |
-8.32% |
-10.24% |
|
SLB |
-6.59% |
-18.54% |
|
RIG |
-9.68% |
-30.60% |
|
VLO |
-1.89% |
+22.86% |
|
TSO |
-4.47% |
+31.96% |
Over the course of last week, ‘The Energy Select Sector SPDR’ suffered a loss of 8.50% as investors witnessed a bout of heavy selling in major companies. The worst performer was Houston-based energy major ConocoPhillips COP whose stock shed 10%.
Longer-term, over the last 6 months, ‘The Energy Select Sector SPDR’ lost 20% of its value. Offshore drilling powerhouse Transocean Ltd. was the main laggard, as it witnessed a 31% price decline. However, downstream operator Tesoro Corp. TSO was able to buck the trend and was the chief beneficiary on the bourses with its shares advancing 32% during this period.
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 top-tier economic readings, including those on wholesale inventories, jobless claims and consumer sentiment.
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