It was a week where both oil and natural gas prices settled lower.
On the news front, London-based oilfield services provider TechnipFMC plc FTI announced plans to spin off its engineering and construction business, creating two independent companies, while Kinder Morgan, Inc. KMI agreed to sell its Canadian unit and the U.S. portion of the Cochin pipeline.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures fell 1.2% to close at $54.17 per barrel, while natural gas prices dropped 2.2% for the week to finish at 2.152 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Equinor's Mariner Starts Up, BP Expands India Business)
The U.S. crude benchmark suffered a loss amid fears of a global economic slowdown in the backdrop of the U.S.-China trade war and a report from the U.S. government showing a surprise increase in fuel stockpiles.
Natural gas prices were down even as weekly inventory release showed a smaller-than-expected increase in supplies. The positive sentiment was overwhelmed by unfavorable short-term temperature prediction and rising production, which led prices to squeeze down.
Recap of the Week’s Most Important Stories
1. Seabed-to-surface oilfield equipment and services provider TechnipFMC announced plans to separate its engineering and construction business from its technology-focused subsea and surface operations, thereby creating two independent, publicly traded companies.
The spin-off, which could take effect by Jun 30, 2020 subject to certain precedent conditions, will see the formation of a new company that will include Zacks Rank #3 (Hold) TechnipFMC’s Onshore/Offshore segment. Apart from expanding its LNG project capacity, the engineering and construction services company will also widen its focus to include projects associated with biofuels and alternative energy. The 15,000-strong firm will have Catherine MacGregor as the CEO – a Schlumberger veteran who is currently serving as President of TechnipFMC’s New Ventures unit.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The remaining business will continue to be upstream-focused and comprise TechnipFMC’s capital intensive subsea technologies and services. It will be headed by Doug Pferdehirt, the Chairman and CEO of TechnipFMC. With an employee strength of about 22,000, the company – touted as the industry’s largest pure-play operator – will provide high-end equipment to oil and gas producers. (Read more TechnipFMC Moves to Unlock Value by Splitting in Two)
2. Kinder Morgan has announced two separate agreements with Pembina Pipeline Corporation, mostly to strengthen its balance sheet.
One of the deals entails Kinder Morgan’s decision to divest Cochin condensate pipeline’s portion in the United States for a consideration of $1.546 billion. The other transaction involves the company’s plan to sell its 70% ownership stake in Kinder Morgan Canada Limited. Notably, this has opened up scope for Kinder Morgan to carry out its plan of exiting Canada. The exit program started in 2019 with the divestment of the disputable Trans Mountain pipeline.
The deals — awaiting customary closing conditions and likely to close either by the December quarter of 2019 or the March quarter of 2020 — will fetch Kinder Morgan a total of $2.5 billion. Kinder Morgan added that its primary intention is to employ the sale proceeds to lower debt burden. This will make the company’s balance sheet strong and will also enable the midstream player to maintain its ratio of net debt to adjusted EBITDA at 4.5 times. (Read more Kinder Morgan to Secure $2.5B From 2 Deals With Pembina)
3. Royal Dutch Shell RDS.A has offered to buy ERM Power Ltd for A$617 million ($419 million), thus marking its entry into Australia’s highly competitive energy market. ERM is Australia's second largest energy retailer to businesses and industry.
The all-cash takeover bid represents 43% premium to ERM’s closing share price of A$1.72 on Aug 21, thereby valuing ERM at A$2.46 a share. Post the deal’s announcement, shares of ERM increased to four-and-a-half-year high of A$2.50. After the culmination of the agreement, Shell will obtain full ownership of the ERM Power. The deal is expected to be completed in 2019.
By 2030, Shell aims at becoming the world’s largest power producer. With the ERM contract, Shell has strengthened its position in the electricity sector, taking a step forward to cleaner energy. By 2025, it strategizes to uplift its annual spending on power business between $2 billion and $3 billion. (Read more Shell to Acquire Australia's ERM Power for $419M)
4. Equinor ASA EQNR recently announced the discovery of oil in the Sputnik exploration well, located in the Barents Sea, around 30 kilometres North East of the Wisting finding. The company witnessed an oil column of 15 meters in the Triassic sandstone reservoir in the PL855 license, with samples comprising both light oil and water.
The company’s initial estimate of recoverable resources from the discovery is currently in the range of 20-65 million barrels of oil. Finding oil in the well is expected to encourage Equinor as it has acquired a strong acreage position in the region, which has a complex geology. However, the commerciality of oil extraction from the discovery is yet to be determined.
Operator Equinor owns a 55% stake in the PL855 license, while partners OMV of Austria and Norwegian state-run Petoro hold 25% and 20% interest, respectively. (Read more Equinor Discovers Light Oil in Barents Sea on Second Try)
5. World Fuel Services Corp. INT recently announced plans to buy Universal Weather and Aviation’s UVair fuel business. The deal, worth $170 million (part of which will be paid over three years), will be financed through cash-on-hand and liquidity via the company’s existing unsecured credit facility.
After a three-year hiatus, the acquisition game is back on for World Fuel Services, now in the aviation segment. The aviation segment plays a vital role in the growth of the company and is considered to be the best performer. It contributes 50% of operating profit.
UVair, the fueling segment of the Universal Weather and Aviation is headquartered in Houston, Texas. This division is a large-scale supplier of fuel at over 5,000 locations all over the world. It provides fuel to business and general aviation customers, a majority of which is supplied to the U.S. As both the companies are core fuel suppliers, the UVair acquisition will complement World Fuel Services’ aviation business and in fact will have a few customers in common.(Read more World Fuel Resumes Acquisition Game with Aviation Segment)
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 |
-1.2% |
-15% |
|
CVX |
-0.5% |
-3.1% |
|
COP |
-2% |
-24.9% |
|
OXY |
-4.9% |
-36% |
|
SLB |
-2.1% |
-29.1% |
|
RIG |
+1.2% |
-48.2% |
|
VLO |
-5% |
-12.1% |
|
MPC |
+0.1% |
-26.9% |
The Energy Select Sector SPDR – a popular way to track energy companies – was down 1.9% last week. The worst performer was independent refining giant Valero Energy VLO whose stock fell 5%.
Longer-term, over six months, the sector tracker is down 14.4%. Offshore driller Transocean Ltd. RIG was the major loser during this period, experiencing a 48.2% price plunge.
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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