Back to top

Analyst Blog

Crude prices consolidated its hold over $100 during the past week on expectations of an improving demand outlook and smaller-than-expected rise in inventories, while natural gas topped $6 for the first time in 5 years as the latest bout of frigid temperatures fuel further concerns about the already tight supplies.

Among the newsmakers, Canadian Natural Resources Ltd. (CNQ - Analyst Report) entered into a $3 billion deal to buy some of Devon Energy Corp.’s (DVN - Analyst Report) Canadian gas assets, while Royal Dutch Shell plc (RDS.A - Analyst Report) will be selling its Australian refinery and petrol stations for about $2.6 billion.     

Crude Oil:

Crude prices edged up a little last week on positive demand outlook for heating oil amid below-normal temperatures that have prevailed for most part of the winter. The commodity got some more support from news of ongoing conflicts in Libya and South Sudan that could pressure the black gold’s supply. Sentiments were further brightened by the Energy Information Administration (EIA) report that showed a lower-than-expected increase in oil inventories.

To some extent, the bulls were offset by a surprise drop in industrial production and dismal existing home sales data that seems to question the country’s economic recovery. A contraction in Chinese manufacturing also weighed on crude prices.

As a result of these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was in the black and settled at just over $102.00 per barrel, gaining 2.0% for the week. 

Natural Gas:

Natural gas rallied last week to its highest level in 5 years on the back of a large decrease in supplies and forecasts of continued freezing cold weather conditions.

The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states fell by 250 billion cubic feet (Bcf) for the week ended Feb 14, within the guided range (of 248–252 Bcf drawdown). Importantly, the decrease – the fourth successive drop of 230 Bcf or more – was considerably higher than both last year’s withdrawal of 131 Bcf and the 5-year (2009–2013) average reduction of 133 Bcf for the reported week.

Chilly weather forecasts – in the northern U.S. over the next few days – are likely to further spur natural gas’ demand for heating.

Influenced by these factors, natural gas prices ended Friday at $6.14 per million Btu (MMBtu), up 18.0% over the week.

Energy Week That Was:

The week’s energy coverage was dominated by the following news:

Canadian Natural Buying Devon Assets for $3B

Independent energy explorer Canadian Natural Resources Ltd. has agreed to acquire certain liquids-rich natural gas properties in western Canada from Oklahoma City-based Devon Energy Corp. for $2.86 billion in cash. The market reacted positively to the news, which was announced before market hours on Wednesday, Feb 19.

Shares of Canadian Natural ended at $36.69 on that day – up 2.6% from Tuesday’s close. The to-be-bought assets – adjacent to Canadian Natural’s existing fields in the region – hold an estimated 272.2 million oil-equivalent barrels (MMBOE) in proved reserves (70% gas) and will add 86,633 BOE to the nation’s largest heavy oil outfit’s daily production.

Shell to Get $2.6B for Australian Assets

Europe’s largest oil company Royal Dutch Shell plc has entered into an agreement with Swiss international energy trading giant Vitol Group to sell its Australian downstream assets for approximately $2.6 billion. The transaction – subject to regulatory approvals – is expected to close in 2014.

The to-be-sold properties covers the Anglo-Dutch energy major’s Geelong refinery near Melbourne and its 870 retail outlets, apart from bulk fuels, bitumen, chemicals and a portion of Shell’s lubricants businesses in Australia. However, the scope of the contract does not include the Aviation unit, which will remain with The Hague, Netherlands-based group.

Exxon Full Reserve Replacement Continues

Energy giant Exxon Mobil Corp. (XOM - Analyst Report) announced that it has replaced 103% of its 2013 production by adding proved oil and gas reserves totaling 1.6 billion oil-equivalent barrels, including a 153% replacement ratio for crude oil and other liquids. However, this did not have any impact on the bourses as the integrated oil major has been replacing more than 100% of its reserves regularly over the past two decades. At year-end 2013, Exxon Mobil's proved reserves totaled 25.2 billion oil-equivalent barrels, comprising 53% liquids, up from 51% in 2012, and 47% natural gas, down from 49% in 2012.

Cabot Falls Despite Strong Q4

Natural gas producer Cabot Oil & Gas Corp. (COG - Analyst Report) slid 8% despite reporting fourth quarter numbers that beat analyst expectations on the back of significant increase in production levels. Much of the share price decline seems to be tied to Cabot’s failure to match its earlier blowout quarters. As mentioned above, though the company actually beat estimates, it was not enough to appease investors, who expected more growth.

Nabors Surges on Q4 Beat

Shares of onshore contract driller Nabors Industries Ltd. (NBR - Analyst Report) popped more than 13% on Wednesday following a better than expected earnings announcement. The Hamilton, Bermuda-based company’s outperformance was primarily due to impressive gains from international operations. In more encouraging news for the investors, Nabors said that domestic drilling fundamentals have improved considerably, with pricing and utilization expected to be strong during the near future.             

Performance Chart of Some Major Companies:

The following table shows the price movement of the major oil and gas players over the past 5 days and during the last 6 months.

 

Ticker

Last 5 Day’s Performance

6 month performance

XOM

+3.57%

+8.58%

CVX

+0.76%

-5.73%

COP

-0.03%

-2.81%

OXY

-0.37%

+8.19%

SLB

-0.28%

+10.29%

RIG

-0.44%

-7.96%

VLO

+3.06%

+37.99%

TSO

+0.79%

+2.71%

 

Other Headline News on Energy:

Williams Companies Beats on Q4 Earnings

North American energy firm, Williams Companies Inc. (WMB - Analyst Report) reported better-than-expected fourth-quarter earnings, primarily owing to increased fee-based revenues. However, the figure decreased 12.0% from the year-ago adjusted profit. Reduced natural gas liquid margins, plant shut down activities along with increased operating and maintenance expenses affected the results.     

Ensco Misses on Earnings, Grows YoY

Oil and natural gas driller Ensco plc (ESV - Analyst Report) came short of fourth quarter earnings estimates on disappointing floater revenues. However, results improved markedly from the year-ago period due to the deployment of new rigs over the past year that increased utilization and average dayrates.  

Seadrill Gets Pemex Deal, Forms JV

Norwegian oilfield service firm Seadrill Ltd. (SDRL - Snapshot Report) announced that it has finalized the drilling contracts for the jackup units – West Oberon, West Intrepid, West Defender and West Courageous. The contracts pertain to a Heads of Agreement with the Mexican state-owned petroleum company Pemex. Seadrill is awaiting approval from Pemex for its fifth jackup unit – West Titania – expected sometime in second quarter 2014. With the long-term nature of the contracts (each of the five units being contracted for about 6 years), Seadrill expects revenues of over $1.8 billion.

This Week’s Outlook:

Apart from the usual releases in this holiday shortened week – the U.S. government data on oil and natural gas – market participants await reports on consumer confidence and durable orders. But most important of all is the GDP report due on Friday, which will shed further light on how well the economy is doing.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Please login to Zacks.com or register to post a comment.