It was a week where oil was a casualty of Brexit-fueled selloff, while natural gas was one of the few commodities to buck the trend.
On the news front, Energy Transfer Equity L.P. ETE got legal permission to walk away from the merger with Williams Companies Inc. WMB.
Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures edged down 0.7% to close at $47.64 per barrel, natural gas prices were up 1.5% to $2.662 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Marathon Oil to Buy PayRock Energy, Pioneer Expands Midland Footprint.)
Oil prices moved south for just the fourth time in 12 weeks, as chaos and uncertainty prevailed following the U.K. electorate’s vote to leave the EU in a historic referendum. As expected, the undeniable and immediate fallout was the plunge in the value of the British pound, which crashed to 1985 lows. This led to a flight toward safe haven currencies like the dollar, whose strength made the greenback-priced crude more expensive for investors holding foreign currency and suppress prices.
The negative effect of Brexit – the short way of saying Britain’s exit from the EU – was partially offset by the Baker Hughes report, which showed a fall in the U.S. oil rig count for the first time in 4 weeks – indicating a break in shale drilling activities.
Natural gas rose again following a lower-than-average build and predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days.
Recap of the Week’s Most Important Stories
1. Texas pipeline operator Energy Transfer Equity L.P. is no longer bound by its agreement to buy rival natural gas pipeline company Williams Companies Inc., according to the recent ruling by the Supreme Court of Delaware.
Notably, the ruling came in a lawsuit filed by Williams to hold Energy Transfer Equity to the deal. In May, Williams took the legal step when Energy Transfer Equity expressed concerns over the merger citing that the deal had not secured the necessary legal opinion to make it tax-free for shareholders. This marked the third separate lawsuit filed by the company over the span of six weeks. Per Williams, Energy Transfer Equity was using the tax opinion as a ruse to miss the merger deadline of Jun 28, and was deliberately trying to disorganize the deal.
However, much to the dismay of Williams, the Supreme Court ruled in favor of Energy Transfer Equity. The court concluded that Energy Transfer Equity had not breached the merger agreement when in March it reported a tax problem that would prevent the deal from closing on the scheduled date. (See More: Energy Transfer Gets Permission to Exit Williams Deal.)
2. Oil and gas producer Newfield Exploration Co. NFX provided a provisional operations update and increased production expectations for the second-quarter and full-year 2016.
The company now expects its second-quarter net production to exceed the mid-point of its previous guidance by about 0.5 million barrels of oil equivalent (MMBOE) and is projected to be about 15.2 MMBOE. The earlier guidance was in the range of 14.4–14.9 MMBOE.
Domestic net production is estimated to be more than 13.6 MMBOE, up from the previous projection of 13.0–13.5 MMBOE. International net production, on the other hand, is anticipated to be about 1.6 MMBOE, up 14.3% from its earlier guidance of 1.4 MMBOE. Full-year net production is now projected to be between 56.0 MMBOE and 58.0 MMBOE compared with the earlier range of 54.5–56.5 MMBOE. (See More: Newfield Provides Interim Operational Update, Ups Guidance.)
3. Calgary, Alberta-based energy explorer Encana Corp. ECA announced that it has entered into an agreement to divest its Gordondale assets in northwestern Alberta to another Calgary-based company – Birchcliff Energy – for C$625M. This sale includes about 54,200 net acres of land with wells churning out an average of 25,200 barrels of oil equivalent a day (65% natural gas). The sale of Gordondale resources – situated in the Montney basin – will leave Encana with 9,000 potential drilling locations. More than 65% of those wells will be situated in the condensate-rich part of the play.
The transaction will help Encana to strengthen its balance sheet and provide financial flexibility, especially in this low commodity price environment. It will also free the company from as much as C$100 million in future spending commitments on the property, which in turn, will help Encana focus on core areas in Canada and the U.S. (See More: Encana to Divest Gordondale Assets for C$625 Million.)
4. U.S. energy holding company Energen Corp. EGN announced that it has signed purchase and sale agreements (PSAs) for its non-core Delaware Basin and San Juan Basin assets. Per the agreement, the total gross proceeds after including all sales transactions with multiple, undisclosed buyers comes to $551.7 million. The transactions are expected to close by mid-August. The company expects to incur minimal taxes in association with these transactions.
Total production for all the properties to be divested averaged 9.0 thousand oil-equivalent barrels per day in Apr 2016, of which only 34% was oil. The majority of the production is in the San Juan Basin. In the Delaware Basin, the assets to be divested consist of unproved leasehold of approximately 55,000 net acres.
With the sale of its San Juan Basin assets, Energen would transition into a pure Permian Basin operator. The future focus would be on drilling and developing its high-quality acreage positions in the Midland and Delaware basins. (See More: Energen in Non-Core Assets' Purchase and Sale Agreements.)
5. Independent energy company QEP Resources Inc. QEP announced the acquisition of oil and gas properties in the northern Midland Basin of the Permian Basin for an aggregate purchase price of approximately $600 million. The company will partly fund the buyout from the proceeds of its recent stock offering.
With this acquisition, QEP Resources will add over 430 potential horizontal drilling locations – that spread over 9,400 acres of land – with its existing core Permian Basin properties. The to-be acquired properties have a production capacity of about 1,400 barrels of oil equivalent per day and hold net proved reserves of approximately 76 million barrels of oil equivalent. The deal is slated to close in September but awaits customary closing conditions. (See More: QEP Resources Prices Stocks to Fund Permian Acquisition .)
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 |
-2.34% |
+12.85% |
|
CVX |
+1.05% |
+11.07% |
|
COP |
+1.19% |
-13.58% |
|
OXY |
-4.07% |
+7.55% |
|
SLB |
-5.08% |
+6.60% |
|
RIG |
+6.08% |
-14.10% |
|
VLO |
-2.01% |
-27.60% |
|
TSO |
+6.34% |
-29.55% |
Over the course of last week, ‘The Energy Select Sector SPDR’ fell 3.19% following the Brexit referendum result. Consequently, investors witnessed selling in some large companies. The worst performer was oilfield services behemoth Schlumberger Ltd. SLB that lost 5.08% of its stock price.
Longer-term, over the last 6 months, the sector tracker is up 6.93%. The world’s largest publicly traded oil company Exxon Mobil Corp. was the main beneficiary during this period, experiencing a 12.85% price increase.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular weekly releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.
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