It was a week where oil prices took a giant stride towards reclaiming the psychologically important $50-a-barrel level and natural gas futures gained on favorable weather predictions.
On the news front, the U.S. House of Representatives voted in favor of relaxing a four-decade ban on crude oil exports, while Canadian Oil Sands Ltd. rejected Suncor Energy Inc.’s SU C$4.3 billion hostile takeover bid.
Overall, it was a bullish week for the sector. West Texas Intermediate (WTI) crude futures rallied 8.9% to close at $49.51 per barrel, while natural gas prices rose 2.1% to $2.50 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP Agrees to Record Oil Spill Fine, Suncor Launches Hostile Bid.)
Oil prices jumped to their highest levels since July, buoyed by the Baker Hughes rig count data that showed another drop in oil-directed rigs – now at their lowest level in more than five years – indicating a break in shale drilling activities. Further support came from a weak U.S. dollar, Syria-related concerns and prospects of collaboration among the major oil producers.
Rebounding from 3-year lows, natural gas surged ahead on a bullish inventory report and predictions of strong heating requirement with forecasts of chilly temperatures across the major U.S. cities over the next few days.
Recap of the Week’s Most Important Stories
1. On Friday, the House of Representatives voted in favor of lifting the 40-year U.S. crude oil export ban. However, the move was opposed by the White House, which had threatened to use veto against the cancellation of the ban. The bill passed the House 261–159. However, it is necessary to reach 290 votes to overrule presidential veto.
The White House has already made its stance on the matter very clear. The Obama administration strongly opposes the removal of crude export restrictions that, according to it, is not the need of the hour. The administration believes that Congress should focus more on clean energy than proving billions of dollars in subsidies to oil companies.
The bill to ban crude oil exports was passed in 1975 to tackle the effects of the Arab oil embargo. The aim then was to retain domestic production in order to protect the economy from commodity price escalation. However, much has changed since. The debate on lifting the ban has intensified of late as the weak crude pricing environment has taken a toll on several U.S. shale explorers.
2. Two days after Suncor Energy Inc. announced plans of a hostile takeover of Canadian Oil Sands Ltd., the latter responded with a so called poison-pill defense strategy.
In a move to “protect shareholders from the opportunistic offer,” Canadian Oil Sands has adopted a new Shareholder Rights Plan. This new plan will give the company’s Board and shareholders adequate time to evaluate Suncor’s offer.
Per this plan, Suncor’s offer fails to make a cut under the ‘permitted bid’ condition. Under the new rights plan, a takeover bid must remain open for shareholder approval for at least 120 days. Suncor has offered time till Dec 4, 2015. The company has also authorized special share purchase rights that would allow existing shareholders to purchase additional units at a substantial discount to the market price. (See More: Canadian Oil Sands Snubs Suncor Energy's Hostile Bid.)
3. U.S. refiner Phillips 66 PSX has lowered its capital budget for 2016. The firm has, however, increased its share buyback plan. The company has set its capital expenditure, excluding Phillips 66 Partners L.P.’s (PSXP) capital program, at $3.6 billion for 2016. Per an analyst report, the company’s pervious capital budget for 2015 was $4.6 billion of which, $200 million was allocated for Phillips 66 Partners.
Of the total budget, Phillips 66 intends to spend $2 billion in its midstream business and $1.2 billion in its refining operations. The 2016 budget emphasizes on financing Midstream growth and improving returns in Refining. But at the same time Phillips 66 increased its share buyback by $2 billion to $9 billion. Per management, the company intends to hike dividends in 2016.
4. Encana Oil & Gas (USA) Inc, the wholly owned affiliate of Canada’s upstream energy firm Encana Corp. ECA, has entered into a deal to divest its oil and gas resources in Denver Julesburg Basin for a total consideration of $900 million. These assets, located in Colorado, will be sold to a new joint venture, in which 95% is held by the Canada Pension Plan Investment Board. The remaining 5% is owned by The Broe Group, a private-equity firm in Denver.
The oil and gas properties to be sold cover roughly 51,000 net acres in the DJ Basin. During the first half of 2015, the assets’ daily production was 14,800 barrels of liquids and 52 million cubic feet of natural gas. Encana added that the proceeds from the divestment will primarily be utilized for strengthening its balance sheet mainly by reducing debt. (See More: Encana to Sell Denver Julesburg Basin Properties for $900M.)
5. Upstream energy firm LINN Energy LLC LINE declared that it has approved management’s decision and suspended its distribution. Dividend of LinnCo LLC, an affiliate of LINN Energy, has also been suspended. The suspensions have been effective from Sep 30, 2015. LINN Energy mentioned that it will continue to evaluate its performance to reinstate the distribution and dividends.
Dividend cuts and suspensions seem have become a well-accepted strategy in the energy sector, especially in the exploration and production industry. The plunge in crude prices has made maintaining profitability a challenge for many energy companies. (See More: LINN Energy: Latest Addition to the Dividend Suspension List.)
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 |
+0.05% |
-7.08% |
|
CVX |
+2.51% |
-16.68% |
|
COP |
+4.67% |
-16.69% |
|
OXY |
+1.92% |
-6.05% |
|
SLB |
-0.63% |
-14.86% |
|
RIG |
+0.64% |
-4.10% |
|
VLO |
+0.22% |
+12.25% |
|
TSO |
-1.16% |
+26.19% |
Over the course of last week, ‘The Energy Select Sector SPDR’ maintained its positive momentum and posted a jump of 3.45% as investors witnessed another bout of heavy buying in major companies. The best performer was Houston-based energy major ConocoPhillips COP that added 4.7% to its stock price.
Longer-term, over the last 6 months, ‘The Energy Select Sector SPDR’ lost 15.1% of its value. U.S. supermajor Chevron Corp. CVX was the main laggard, as it witnessed a 16.7% 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 26.2% 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 crucial economic reports, including those on retail sales and industrial production.
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