It was another week where oil prices witnessed a big drop, falling to a 6 year low on oversupply fears. On the news front, Chevron Corp. (CVX) revealed a major discovery in deepwater Gulf, while BP plc (BP) lost an appeal over the 2010 oil spill penalties.
Overall, it was another bearish week for the sector. West Texas Intermediate (WTI) crude futures fell 8.2% to close at $48.36 per barrel, while natural gas prices were down around 2% to $2.95 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Crude Rout Continues; BP, ConocoPhillips Announce Field Startups.)
Oil prices continued the slide and fell for the seventh successive week. The commodity has been hammered since November’s decision by the OPEC oil cartel 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. Investors were further spooked by Goldman Sachs’ oil price forecast cut and the Gulf producers’ continued reluctance to arrest the price decline through output cuts.
Natural gas – which slumped to its lowest level in more than two years on Wednesday – rebounded somewhat during the later part of the week on expectations of cranked up heating demand across Northeast and Midwest U.S. with forecasts of cooler weather over the next few days. However, prices still remain around 80% below the 2008 peak of $13.50 per MMBtu.
Recap of the Week’s Most Important Stories
1. Integrated energy firm Chevron Corp. has made another important oil discovery in the Gulf of Mexico (GoM). The deepwater find, at its Anchor prospect, is the second by the company in the region within the span of a year. Chevron U.S.A. Inc., a subsidiary of Chevron, holds 55% operating interest in the Anchor prospect.
The discovery was made through Well No. 2 in the Green Canyon Block 807, which is located about 225 kilometers offshore Louisiana. The discovery well, spudded in Aug 2014, was drilled to a depth of 10,287 meters and found oil in multiple Lower Tertiary Wilcox Sands. Chevron added that the appraisal drilling of the well will commence this year. (See More: Chevron Makes Another Oil Discovery in the Gulf of Mexico.)
2. Oil giant BP plc’s ongoing court case tied to its 2010 Gulf of Mexico (GoM) oil spill suffered a setback on Friday. The 5th U.S. Circuit Court of Appeals voted 7-6 against a rehearing of its 2014 ruling that the company cannot avoid related federal penalties by passing the buck to another company's failed equipment.
The oil firm had earlier agreed to pay $4 billion in criminal fines. However, with the court upholding its earlier verdict, another $18 billion of penalties for violating the federal Clean Water Act could be slapped on the company. (See More: BP GoM Unfavorable Spillover Ruling Upheld by U.S. Court.)
3. Shares of contract drilling services provider Helmerich & Payne Inc. (HP) fell 6.6% on the NYSE following a bearish operational update. The company stated that drilling activity and rig dayrates are expected to witness a significant decline owing to low crude prices. Since Dec 11, the company’s idle and available FlexRig count has increased to 26 from 15. Another 40–50 such rigs are expected to become idle in the next 30 days.
The weakness extends to the pricing market as well. Helmerich & Payne said that second quarter spot pricing for its FlexRigs have gone down about 10% from that of the current quarter. To make matters worse, the company received early termination notice for four of its long-term contracts. (See More: Helmerich & Payne Shares Fall on Weak Drilling Outlook.)
4. SM Energy Co. (SM) announced that it is initiating a process to sell its gas-producing assets in the Mid-Continent regions of Oklahoma, Texas and Louisiana. Moreover, the company will close its regional office in Tulsa, OK. The to-be-sold properties include the Arkoma Basin of Oklahoma and in the Arklatex area of East Texas and Northern Louisiana. During 2014, these assets produced about 3.4 million barrels of oil equivalent net (98% gas).
The latest sale – expected to close by mid-2015 – forms a part of the Denver-based oil and gas explorer’s strategy to increase focus on its core assets in the Eagle Ford and Bakken/Three Forks areas. (See More: SM Energy to Sell Mid-Continent Assets & Oklahoma Office.)
5. With no respite from the oil price plunge, independent exploration and production company Canadian Natural Resources Ltd. (CNQ) cut its 2015 capital spending guidance, as it now forecasts less spending and lower output from what it projected previously.
Given the persisting oil price weakness, Canadian Natural has reduced its expected 2015 capital expenditure by almost 28% to C$6.2 billion from C$8.6 billion. The budget cut then prompted the company to lower its 2015 production guidance to 840−887 thousand barrels of oil equivalent per day (MBOE/D) from the prior range of 869−916 MBOE/D. A tight budget will now force the company to trim its drilling operations in North America and abroad.
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 |
-2.61% |
-12.03% |
|
CVX |
-5.77% |
-18.09% |
|
COP |
-8.50% |
-26.53% |
|
OXY |
-2.62% |
-22.84% |
|
SLB |
-8.86% |
-32.68% |
|
RIG |
-14.40% |
-64.25% |
|
VLO |
-5.87% |
-5.13% |
|
TSO |
-7.28% |
+17.88% |
Energy investors witnessed another bout of heavy selling in major companies amid mounting evidence of oil’s oversupply. Of the lot, the biggest loser was offshore driller Transocean Ltd. (RIG), which fell 14.4% during the period. With oil prices down more than 50% since June and energy companies cutting costs by scaling back drilling, the likes of Transocean are having to deal with less orders. Moreover, the company has been placed under review from global rating agency Moody’s for a possible debt downgrade.
Over the last 6 months, refiner Tesoro Corp. (TSO) has been the leader of the pack with its shares advancing 17.9%. Investors have rewarded the company for its continued focus on shareholder returns. Transocean was again the laggard, as it witnessed a 64.3% 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 retail sales, inflation and industrial production among others.
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