It was a week where both oil and natural gas prices experienced noticeable upticks on healthy storage draws.
On the news front, supermajor Royal Dutch Shell plc RDS.A has signed an agreement to purchase British energy supplier First Utility, while domestic natural gas producer Cabot Oil & Gas Corporation COG announced plans to offload its Eagle Ford shale holdings for $765 million.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures gained about 2% to close at $58.47 per barrel, while natural gas prices rose 2.1% to $2.667 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: MDR-CBI Tie-Up, STO's Oilfield Stake Buy & More)
The U.S. oil benchmark recorded an increase for the first time in three weeks. The major catalyst was the Energy Department's inventory release, which revealed that crude stockpiles recorded a higher-than-expected weekly draw. Data showing the number of U.S. oil rigs not rising for a second straight week helped cement those gains.
Oil stockpiles have shrunk in 29 of the last 37 weeks and are down nearly 97 million barrels since April. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 436.5 million barrels, current crude supplies are 10.1% below the year-ago period and the lowest since 2015
Meanwhile, natural gas futures recovered from last week’s ten-month lows following a larger-than-average decrease in supplies. Favorable weather forecasts (translating into robust heating gas demand) added to the positive sentiment.
Recap of the Week’s Most Important Stories
1. In a bid to lower its carbon footprint, Royal Dutch Shell recently inked a deal to acquire UK’s energy supplier First Utility. The move will enable Shell to expand its energy supply business from commercial and industrial customers and venture into the residential sector. The purchase price of the transaction has been kept under wraps. Subject to regulatory approvals and satisfactory closing conditions, the deal is set for completion by the end of the first quarter of 2018. (Read more Shell Boosts Power Market Presence With First Utility Buyout)
The announcement of the acquisition comes amid a challenging time for UK’s energy firms as the British Prime Minister Theresa May plans to cap electricity and gas bills until 2020 which could dampen competition. Since 2012, new energy suppliers have increased competition in the space, lowering the Big Six’s market share from nearly 100% to about 80%. The latest acquisition deal will further intensify the competition putting more pressure on the Big Six. The move will mark Shell’s entry to Britain's household energy market, enabling the company to develop innovative new services for customers.
First Utility will operate as a stand-alone entity and subsidiary of Shell within its New Energies division in which the company will invest approximately $1 billion per year till 2020 to shift its focus on cleaner and renewable energy sources. The new business will serve as a hedge for reduced gasoline and diesel fuel demand.
2. As part of its cost-containment initiatives, Cabot Oil & Gas Corporation recently inked a deal to divest Eagle Ford Shale holdings to a unit of Venado Oil & Gas LLC for $765 million. Subject to satisfactory closing conditions, the deal is set for completion during the first quarter of 2018.
The divested assets will include around 74,500 acres which produced 15,656 barrels of oil equivalent per day in the third quarter of 2017. The assets accounted for just 5% of the total year-to-date equivalent production and 4% proved reserves. The company will record a one-time charge of around $270-$280 million on the Eagle Ford sale in the fourth quarter. In a separate transaction, the company also offloaded remaining East Texas properties to an undisclosed buyer.
Cash proceeds from this transaction will strengthen the balance sheet of the company boosting its free cash flow generation. Cabot’s execution success, disciplined capital allocation and improving well economics will enhance its outlook, driving the shareholder value by share buyback programs and dividend growth. Further, the portfolio streamline is in sync with the company‘s aim to increase its focus on the lucrative Marcellus shale. (Read more Cabot to Offload Eagle Ford Assets for $765 Million)
3. Petrobras PBR recently announced its Business and Management Plan ("BMP") for 2018-2022, which shows marginally higher investments than the 2017-2021 period. The new five-year plan forecasts $74.5 billion in investment compared with $74.1 billion for 2017-2021, projected earlier.
Notably, the BMP 2018-2022 focuses on increasing production and supporting company's finances. While around $60.3 billion will be used in exploration and production, nearly $13.1 billion is likely to be spent on refining and natural gas. Petrobras intends to boost average production from an expected 2.7 million barrels of oil equivalent per day (Boe/d) in 2018 to 3.55 million Boe/d by 2022. The plan will be supported by the eight platforms going into production in 2018 and 11 more coming online by 2022.
Furthermore, Petrobras has plans to reduce its operating expenses to $136.8 billion from $153 billion projected in the five-year plan earlier. Also, operating cash generation is estimated to be around $141.5 billion, after dividends. The Zacks Rank #3 (Hold) company expects these initiatives to help in reducing its debt without drawing new funds. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
4. In a bid to delever balance sheet and slash costs, Cenovus Energy Inc. CVE recently unveiled a leaner capex budget for 2018. The capital discipline is targeted to support the acquisition of oil sands assets worth C$16.8 billion from ConocoPhillips earlier this year. In 2018, Cenovus intends to remain focused on reducing huge debt burden, strengthening balance sheet and optimizing asset portfolio.
The company announced a $1.5-$1.7 billion capital program for 2018 with majority of capital allocated toward oil sands operation. Cenovus Energy expects to invest between $1.04 billion and $1.16 billion in the Deep Basin in 2018. Oil sands operating cost and sustaining capital costs have been reduced by 8% and 12%, respectively, compared with the prior guidance. Further, it has allocated $270 million for the construction of the phase G expansion at Christina Lake given the lower costs of operations. The go-forward capital efficiencies for the company’s Christina Lake operations have improved by 21%, compared with the previously provided range.
The company plans to decrease workforce by 15%, laying off around 500-700 employees. As a part of the cost containment efforts adopted during the industry downturn, Cenovus Energy has already retrenched around 1,500 and 400 jobs in 2015 and 2016, respectively. (Read more Cenovus Energy Unveils Leaner Capex Amid Leverage Concerns)
5. Eni S.p.A. E announced that it has commenced natural gas production in Zohr field, located off the coast of Egypt. The field has huge gas reserves, estimated at more than 30 trillion cubic feet by the integrated energy firm.
The company had discovered the giant field in 2015. Hence, the production of first gas within less than two and a half years has been a big achievement for the company, considering the size of the field. With huge and potential gas resources, the discovery was touted to be the largest in the Mediterranean area.
In a separate announcement, Eni revealed that it has diversified its upstream portfolio by broadening its footprint in Morocco. With a Petroleum Agreement (PA) with Office National des Hydrocarbures et des Mines (ONHYM), the Italian energy firm will be able to explore potential offshore resources spreading over 23,900 square kilometers. (Read more: Eni's First Gas from Zohr Field, Broadens Moroccan Footprint)
Price Performance
The following table shows the price movement of some the major oil and gas players over the past week and during the last six months.
|
Company |
Last Week |
Last 6 Months |
|
XOM |
+1.3% |
+2.9% |
|
CVX |
+4.6% |
+19.1% |
|
COP |
+6.1% |
+23.8% |
|
OXY |
+3.5% |
+21.4% |
|
SLB |
+8.1% |
+2.3% |
|
RIG |
+9% |
+28.2% |
|
VLO |
+4.2% |
+38.1% |
|
ANDV |
+3% |
+21.6% |
In line with the week’s bullish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +3.9% return last week. The best performer was offshore drilling rig operator Transocean Ltd. RIG whose stock jumped 9%.
Longer-term, over 6 months, the sector tracker is up 11.8%. Downstream operator Valero Energy Corporation VLO was the major gainer during this period, experiencing a 38.1% price appreciation.
What’s Next in the Energy World?
In this holiday-shortened week, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas – one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count.
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