It was a week where the price of oil ended slightly lower. However, natural gas futures rose sharply.
On the news front, the world’s largest publicly traded oil company ExxonMobil Corp. XOM has decided to combine its refining and marketing units, while Anglo-Dutch oil giant Royal Dutch Shell plc RDS.A restored its full-cash dividend after more than two years.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost about 1% to close at $58.36 per barrel, natural gas prices jumped 5% to $3.061 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell Boosts EV Charging Network, Petrobras Starts Up Project)
Notwithstanding OPEC and other major producers’ agreement to expand their output-cut deal beyond March – for another nine months to the end of 2018 – the U.S. oil benchmark fell from previous week’s two-and-half year high. The major culprit was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. In fact, U.S. output rose by 13,000 barrels per day last week to 9.7 million barrels per day – the most since the EIA started maintaining weekly data in 1983.
Meanwhile, natural gas futures logged a big increase despite a smaller-than-expected decrease in supplies as investors chose to bet on the return of colder weather (translating into strong heating gas demand) over the next few weeks.
Recap of the Week’s Most Important Stories
1. Energy giant ExxonMobil Corporation plans to merge its two separate business units into ExxonMobil Fuels & Lubricants Company.
The merger is expected in first-quarter 2018. The merged company will be headed by the current president of ExxonMobil Fuels, Lubricants & Specialties Marketing Company — Bryan Milton — effective Jan 1, 2018. Milton has been elected as the president by the Zacks Rank #2 (Buy) company’s board of directors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The combination of two operations — ExxonMobil Refining and Supply Company and ExxonMobil Fuels, Lubricants & Specialties Marketing Company — will enable the company take better decisions and boost performance in the market. The development enable ExxonMobil generate more cashflow from downstream activities – helping the energy giant to counter the volatility in its upstream business.
In detail, ExxonMobil reported only $196 million profit from its upstream operation during 2016, following persistent weak crude prices, compared to as high as $8.8 billion earnings from the downstream and chemical businesses. (Read more: ExxonMobil to Merge Refining & Marketing Divisions)
2. Shares of European oil giant Royal Dutch Shell plc rose 3.36% after the company announced plans to resume full-cash dividend payouts and share repurchase program.
Hit by the industry downturn and weak financials owing to the $50-billion acquisition of BG Group, Shell began to pay dividend in the form of shares in 2015 to address cash flow woes. However, the supermajor is finally aborting the two-and-a-half-year long scrip dividend program as cost-containment efforts and divestment strategies have paid off. The company’s solid third-quarter results also underscore the fact that it has successfully adapted itself to thrive at $50-barrel crude.
On Management Day, CEO of Shell — Ben van Beurden — announced the resumption of cash dividends from the fourth quarter of 2017. Beurden also announced plans to buy back shares of at least $25 billion by the end of 2020. With the buyback, Shell will be able to overcome the dilution problem under its scrip dividend plan that entitles investors to choose stocks as payout instead of cash. (Read more Shell Resumes Full-Cash Dividend Payment on Oil Revival)
3. Enbridge Inc. ENB plans to focus on more profitable businesses as well as lowering debt burden. This leading midstream energy firm also revealed ways to fund growth projects and announced intention to reward shareholders with dividend hike.
Following the merger with Spectra Energy on Feb 27, Enbridge created the largest energy infrastructure company in North America. Now, Enbridge intends to streamline its portfolio by spending as much as C$22 billion on growth and maintenance developments through 2020-end. While majority of the capital budget – C$14 billion – will likely be funded by internally generated cash, Enbridge will finance C$3 billion through the sale of non-core assets and C$1.5 billion through equity capital – by issuing common stocks.
Investors should know that Enbridge has figured out C$10 billion worth of non-core assets. Of the total, the company expects to monetize at least C$3 billion in 2018 through the divestment of some unregulated natural gas midstream assets and onshore renewable operations.
Enbridge also received an approval from the board of directors to bump up its quarterly dividend. The new dividend of 67.1 Canadian cents, represents a sequential increase of 10%, will likely be paid on Mar 1, 2018, to stockholders of record as of Feb 15, 2018. (Read more Enbridge to Streamline Asset, Hike Dividend, Lower Debt)
4. North American pipeline operator, TransCanada Corporation TRP resumed operations of its Keystone Pipeline on Nov 28. Services of the pipeline operator were stalled on Nov 16 following a spill of around 5,000 barrels in Marshall County, SD. The repair and resumption plans of the pipeline had been evaluated by the Pipeline and Hazardous Materials Safety Administration. Per the review guidelines, the pipeline will now run at a reduced pressure at around 80% capacity, ensuring a safe and controlled operation.
This is the third time, since it has started operations in 2010, that the project has been booked for causing oil spill. Federal investigators believe that constructional fault is the most likely reason for the oil spill. Preliminary investigations suggest that the spill is due to the mechanical fault and a coating associated with the weight installed when the pipeline was built in 2008. This has raised concerns among South Dakota regulators regarding the future operations and potential risks associated with the pipeline.
TransCanada has been instructed to prepare a detailed report analyzing the root cause of the damage along with a remedial course of action to treat it. In this regard, the company now plans to run an inspection device on the Keystone to gauge the risks related to the other sections of the pipeline. (Read TransCanada Keystone Resumes Service, Worries Loom Large)
5. Upstream oil company Carrizo Oil & Gas, Inc. CRZO recently agreed to divest all its Denver-Julesburg Basin assets for a total consideration of $140 million. The deal will also fetch Carrizo up to $15 million in contingent payments over the next three years, which depends on oil price level surpassing a predetermined limit. The company is yet to declare the name of the buyer.
Carrizo expects the transaction, which has an effective date of Sep 1, 2017, to close in January 2018. In the third quarter, the DJ Basin assets produced 2,427 net barrels of oil equivalent per day (Boe/d), of which 69% was oil.
The divestment is in line with the company's strategy, announced earlier this year, to sell its non-core assets. The sale will also help it to lower its debt burden. It is to be noted that as of Sep 30, 2017, the company had long-term debt of $226 million. (Read more Carrizo Divests Non-Core Properties, Stock Declines)
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 6 months.
|
Company |
Last Week |
Last 6 Months |
|
XOM |
+2.9% |
+5.1% |
|
CVX |
+3.1% |
+17.2% |
|
COP |
+3% |
+14.3% |
|
OXY |
+2.9% |
+15.8% |
|
SLB |
+4.2% |
-7.5% |
|
RIG |
+5.9% |
+14.7% |
|
VLO |
+2.2% |
+34.6% |
|
ANDV |
+0.5% |
+28.4% |
Shrugging off the week’s bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.9% return last week. The best performer was offshore drilling rig operator Transocean Ltd. RIG whose stock jumped 5.9%.
Longer-term, over 6 months, the sector tracker is up 5.8%. Downstream operator Valero Energy Corp. VLO was the major gainer during this period, experiencing a 34.6% price appreciation.
What’s Next in the Energy World?
As usual, 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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