It was a week where oil prices dropped to a fresh 7-year low and natural gas futures sunk to a level not seen in almost 17 years.
On the news front, oil services groups Halliburton Co. HAL and Baker Hughes Inc. BHI extended the deadline for closing their $35 billion merger to address concerns raised by the U.S. antitrust regulator.
Overall, it was another pretty bad week for the sector. West Texas Intermediate (WTI) crude futures fell 2.5% to close at $34.73 per barrel, while natural gas prices plunged 11.2% to $1.767 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: As Crude Hits 7-Year Low, Chevron Slashes 2016 Budget.)
Oil prices were driven back to 2009 levels in reaction to the Baker Hughes report that showed a jump in oil-directed rigs – indicating resurgence in shale drilling activities. Crude was also undone by the U.S. Energy Department's latest inventory release that showed a surprise increase in stockpiles. Lastly, a stronger dollar – edging even higher after the Fed policy makers unanimously voted to raise interest rates – has made the greenback-priced crude more expensive for investors holding foreign currency.
Natural gas fared worse after a bearish inventory report showed a smaller-than-expected withdrawal. The heating fuel was also weighed down by predictions of tepid early winter demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.
Recap of the Week’s Most Important Stories
1. Federal authorities reviewing the proposed Halliburton Co.-Baker Hughes Inc. mega-merger have termed the remedies offered to mitigate antitrust concerns as insufficient, pushing back the time frame to rule on the deal.
In a joint statement, the companies extended the closure date to no later than April 30, 2016. Halliburton and Baker Hughes said that the timing agreement with the Antitrust Division of the U.S. Department of Justice (DOJ) would be allowed to pass without reaching a settlement or the DOJ suing to block the pending transaction.
Announced in last year’s fourth quarter and originally expected to close in late November this year, the $35 billion stock-and-cash deal, if finalized, would unite the second- and third-largest oil field services providers and create a key player in the market, where Schlumberger Ltd. is currently the leader. (See More: Halliburton, Baker Hughes Merger Faces DOJ Snag.)
2. U.S. energy behemoth Chevron Corp. CVX has entered into a deal to sell up to 1 million metric tons of liquefied natural gas ("LNG") per annum from its Gorgon venture in Australia. The company said that its subsidiary has signed a long-term agreement in this regard with Chinese power generator China Huadian Green Energy Co. Ltd.
Per the contract, whose financial terms were not disclosed, Chevron – holding an approximately 47% operated interest in the A$43 billion ($37 billion) Gorgon development – would provide LNG to China Huadian Green Energy for a period of 10 years, beginning in 2020.
The China Huadian Green Energy agreement follows Chevron’s multiple deals with Japanese and South Korean companies to sell a major portion of LNG from its Gorgon development. the sales contract represents an important milestone in Chevron’s efforts to commercialize its share of LNG from the Gorgon project.
3. U.K. supermajor BP plc BP announced that its U.S. Lower 48 Onshore oil and natural gas company has agreed to acquire all of Devon Energy Corp.'s DVN assets in the San Juan Basin in New Mexico and Colorado.
The U.S. onshore unit purchased interests in Devon’s storied assets – the Northeast Blanco Unit (“NEBU”) – in the San Juan Basin. The affiliate also bought a section of federal lands located in San Juan and Rio Arriba counties of New Mexico. The financial terms of the deal, however, were not disclosed.
With the transaction, BP would acquire interest in 480 producing wells spread over 33,000 gross acres by the first quarter of 2016, subject to necessary government agency approvals. The transaction marks Houston-based Lower 48 Onshore oil and natural gas business’s first major purchase in seven years and emphasizes its commitment to the San Juan Basin. The San Juan Basin ranks among the Lower 48's most prolific areas with a capacity to yield around 93,000 barrels of oil equivalent per day. (See More: BP's Unit Acquires San Juan Basin Assets from Devon Energy.)
4. Downstream operator Western Refining Inc. WNR has signed an agreement with Northern Tier Energy L.P. to purchase all outstanding common units of the partnership which are not already under the company’s hold.
Per the accord, the unitholders of Northern Tier will get $15 in cash along with 0.2986 share of Western Refining for every unit of the partnership. Notably, this is a revised offer by Western Refining – which presently has 38% interest in the partnership.
Western Refining is likely to utilize cash on hand along with debt for funding the cash portion of the transaction. Management added that with the purchase of Northern Tier – engaged in the refining, retail and transportation activities – the merged company will have a broader presence that will likely help to unlock further shareholder value.
5. Offshore drilling giant Transocean Ltd. RIG declared contract termination of its drillship Discoverer Americas by Statoil ASA ahead of schedule. Since 2009, the dynamic positioning drillship Discoverer Americas was on contract with the Stavanger, Norway-based integrated energy firm. The agreement was supposed to get over by May, next year.
However, Statoil’s inability to secure more work for the rig – covering remainder of the tenure – in the current environment of low commodity prices led to the abrupt termination of the deal. (See More: Transocean Drillship Contract Terminated, Shares Down.)
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 |
+1.40% |
-9.29% |
|
CVX |
-0.46% |
-11.02% |
|
COP |
-9.26% |
-27.93% |
|
OXY |
-2.36% |
-16.06% |
|
SLB |
-5.07% |
-21.87% |
|
RIG |
-5.02% |
-28.45% |
|
VLO |
+5.50% |
+18.67% |
|
TSO |
+3.29% |
+22.83% |
Over the course of last week, ‘The Energy Select Sector SPDR’ suffered a loss of 3.18% as investors witnessed a bout of heavy selling in major companies. The worst performer was Houston-based energy major ConocoPhillips whose stock shed 9.3%.
Longer-term, over the last 6 months, ‘The Energy Select Sector SPDR’ lost 22.47% of its value. Drilling giant Transocean was the main laggard, as it witnessed a 28.5% price decline. However, refiner Tesoro Corp. was able to buck the trend and was the chief beneficiary on the bourses with its shares advancing 22.8% 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. Apart from the all-important GDP numbers, this includes durable orders, personal spending and new home sales.
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