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Oil & Gas Stock Roundup: Devon-WPX Merger, TOTAL's Solar Push & More

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It was a week wherein oil prices finished lower but natural gas futures logged an increase.

On the news front, U.S. shale producers Devon Energy (DVN - Free Report) and WPX Energy have agreed to combine in a bid to strengthen their position in the Permian Basin, while French major TOTAL SE entered into a deal to develop 3.3GW of solar projects in Spain.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost 2.6% to close at $40.25 per barrel, natural gas prices increased 4.4% for the week to finish at 2.139 per million Btu (MMBtu). In particular, the oil market hit a speed bump after posting a gain in the previous week.

Coming back to the week ended Aug 25, oil prices fell on lingering signs of demand weakness. Commercial passenger flights remain seriously curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel essentially grounded. As long as the coronavirus outbreak continues unabated (as is now the case in India and a second wave across Europe), there will be pressure on the demand side of the equation. Per the International Energy Agency (“IEA”), the degree of recovery in oil consumption is expected to decelerate during this quarter and driven by localized lockdowns and containment measures to tackle the recent increase in COVID-19 cases.

Meanwhile, natural gas finished higher after the U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in supplies. The bullish injection, together with a favorable weather forecast, sparked a rebound following two weeks of selloff.

Recap of the Week’s Most-Important Stories

1.  Devon Energy and WPX Energy have decided to merge in a bid to strengthen their position in the Permian Basin. Per the agreement, WPX Energy’s shareholders will get 0.5165 shares of Devon common stock for each share of WPX common stock owned. The enterprise value of the combined entity will be nearly $12 billion, taking into consideration the closing price of Devon and WPX Energy on Sep 25, 2020.

The deal appears to be logical, as both these players have high-quality assets in close proximity. Moreover, both these companies have a focus on developing oil-rich U.S. assets. WPX Energy has gradually transformed itself into an oil-focused company from a natural gas-focused one. Devon, through the divestiture of Canadian assets and Barnett Shale gas assets sale, will focus on four oil-rich U.S. basins.

Upon completion of the deal, Devon’s shareholders will own 53% of the combined company and the rest will be owned by WPX Energy’s shareholders. This acquisition will be accretive to the combined company’s earnings and cash flow, and enable it to achieve cost savings that will drive $575 million in annual cash flow improvements by year-end 2021. (Devon & WPX Energy Eyeing Permian Dominance Through Merger)

2.  TOTAL announced that it is expanding footprint in the Spanish electricity market through an agreement with Spain-based developer Ignis to develop 3.3 gigawatts (GW) of solar projects located close to Madrid and Andalusia. The first project is scheduled to start in 2022 and all the solar projects are expected to begin production from 2025.

A transition toward clean energy sources can be seen on a global scale and Spain is no exception to it. Spain’s current ambition is to generate 70% of electricity from renewables by 2030 and 100% by 2050.

In addition to the current agreement with Ignis, TOTAL has signed agreements in February with Powertis and Solarbay Renewable Energy to develop nearly 2 GW of solar projects. TOTAL also acquired two gas-fired combined cycle power plants having a capacity of 850 MW from Energias de Portugal. (TOTAL Partners Ignis to Expand Renewable Operations in Spain)

3.  Range Resources (RRC - Free Report) recently secured a long-term ethane supply deal. It has agreed to be an anchor supplier for PTTGC America LLC’s proposed ethylene cracker located in the Appalachian Basin.

The agreement is subject to PTTGC America reaching a final investment decision on its proposed world-scale ethylene cracker, which will be built in Belmont County, OH. The decision is expected to come in early 2021. The project can benefit from Zacks Rank #3 (Hold) Range Resources’ low-cost natural gas resources, which can provide a safe and reliable source of ethane. The company will likely provide 15,000 barrels of ethane per day to the facility.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The facility — with ethane feed capacity of 100,000 barrels per day — will produce polyethylene, which is used in food packaging and creating medical equipment. Range Resources will utilize its existing natural gas production in the region and natural gas liquids processing facilities to supply ethane for the cracker. No additional transportation will likely be used for the project, which will keep the costs down. ( Range Resources Wins Supply Deal for Planned Ethane Cracker)

4.  Petrobras (PBR - Free Report) has made hydrocarbon discovery at the Naru well in C-M-657 block in the pre-salt Campos Basin. This exploration well, formally known as 1-BRSA-1376D-RJS, is situated roughly 308 kilometers from the city of Rio de Janeiro at a water depth of 2,892meters.

kilometers from the city of Rio de Janeiro at a water depth of 2,892meters. Management informed that the drilling activity found traces of hydrocarbons in carbonate reservoirs in the pre-salt section. The company will further examine the well data to evaluate its prospects and determine the exploratory activities in the area.

C-M-657 block was acquired in March 2018 during National Agency of Petroleum’s 15th concession round. Petrobras is the chief operator of the block with 30% interest along with ExxonMobil (XOM) and Equinor (EQNR) with 40% and 30% stake, respectively. (Petrobras Finds Hydrocarbons in C-M-657 Block of Campos Basin)

5.   In its weekly release, Baker Hughes (BKR - Free Report) reported that the count of rigs engaged in the exploration and production of oil and natural gas in the United States was 261 in the week through Sep 25 versus the prior-week’s count of 255. The current national rig count is, however, well below the prior year’s 860.

Oil rig count was 183 in the week through Sep25 compared with 179 in the week ended Sep 18. Investors should also note that the current tally of oil rigs — far from the peak of 1,609 attained in October 2014 — is also below the year-ago 713.

The natural gas rig count of 75 was higher than the prior-week count of 73. However, the count of rigs exploring the commodity is lower than the prior-year week’s 146. Importantly, per the latest report, the number of natural gas-directed rigs is 95.3% below the all-time high of 1,606 recorded in 2008. (US Oil & Gas Rig Tally Increases, Permian Witnesses Rebound)

Price Performance

The following table shows the price movement of some the major oil and gas players over past week and during the last six months.

Company    Last Week    Last 6 Months

XOM                 -6.9%              -6.3%
CVX                 -8.2%              +4.4%
COP                -6%                  +15.2%
OXY                -12.3%              -12%
SLB                -15%                 +15.7%
RIG                -24.5%               -23.9%
VLO                -9.8%                 -2.5%
MPC               -11.3%                +23.7%

The Energy Select Sector SPDR — a popular way to track energy companies — lost 8.7% last week. The worst performer was offshore driller Transocean Ltd. (RIG - Free Report) whose stock slumped 24.5%.

For the longer term, over six months, the sector tracker is up 6.5%. Downstream operator Marathon Petroleum was the top gainer during the period, experiencing a 23.7% price appreciation.

What’s Next in the Energy World?

As global oil consumption gradually ticks up from the depths of coronavirus, market participants will be closely tracking the regular releases to watch for signs that could further validate a rebound. In this context, the U.S. government’s statistics on oil and natural gas — one of the few solid indicators that comes out regularly — will be on energy traders' radar. Data on rig count from energy service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is also closely followed.

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