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Oil & Gas Stock Roundup: Spectra Energy & Enbridge to Merge, Apache Scores Big in Texas

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It was a week where both oil and gas prices finished higher.

On the news front, pipeline giants Spectra Energy Corp. (SE - Free Report) and Enbridge Inc. (ENB - Free Report) agreed to merge in a stock-for-stock deal worth $28 billion, while energy explorer Apache Corp. (APA - Free Report) announced a massive discovery in West Texas' Permian Basin.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures added 3.2% to close at $45.88 per barrel, while natural gas prices edged up by a meagre 0.2% to $2.797 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP & CNPC Ink Shale Gas Deal, Diamond Offshore Loses Rig Contract Early.)

Oil prices moved north for the first time in 3 weeks after the U.S. Energy Department's weekly inventory release showed that crude stockpiles recorded a huge drop. As per the federal government’s EIA report, oil inventories decreased by a massive 14.51 million barrels for the week ending Sep 2, 2016 – largest in 17 years. The outsized drop resulted from a tumble in net imports as Tropical Storm Hermine moved into the Gulf of Mexico and prevented tankers from docking.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Natural gas also eked out a small gain following a lower-than-expected build and predictions of strong cooling demand with forecasts of warmer temperature over the next few days.

Recap of the Week’s Most Important Stories

1.    Leading midstream energy companies Spectra Energy Corp. and Enbridge Inc. have decided to merge in a $28 billion transaction with an aim to create the largest energy infrastructure company in North America. The deal will likely be closed by the first quarter of 2017. Post-merger, Enbridge shareholders will have a 57% ownership in the combined entity and Spectra Energy will have the remaining 43% interest.

The amalgamation will form one of the largest global energy infrastructure firms with the merger of the two companies’ highly complementary platforms. With a diverse base of assets that comprises crude, liquids and natural gas pipelines along with terminal and midstream operations, the merged entity will be able to reach key supply basins and markets.

The combined firm is also believed to have solid balance sheets and enough cash flow generating capacity to finance future growth projects. Moreover, the merger will combine two secured giant projects worth $20 billion and $37 billion that are under development. (Read more: Spectra Energy, Enbridge Enter into $28 Billion Merger Deal.)

2.    U.S. energy explorer Apache Corp. reported that it has made a significant new discovery in the Alpine High, which is located in the southern portion of the Delaware Basin in western Texas. The find is expected to contain about three billion barrels of oil and 75 trillion cubic feet of rich gas.

The site - which cost Apache $1,300 per acre for 352,000 gross acres (307,000 contiguous net acres) is expected to generate anywhere from $8 billion to $80 billion in revenue for the company over the life of the wells.

To accelerate drilling in the discovery, Apache has raised its full-year 2016 capital budget by 11% to $2 billion. Per the company, the west Texas field has the potential to become one of the largest discoveries in a decade. (Read more: Apache Announces Discovery of New Oil Field in Texas.)

3.    Oil and gas company EOG Resources Inc. (EOG - Free Report) has agreed to acquire privately held Yates Petroleum Corp. in a $2.5 billion stock and cash deal. Over the years, Artesia, New Mexico-based Yates has gained a rich acreage position across the western U.S. - producing 29,600 barrels of oil equivalent per day (48% oil). EOG Resources currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EOG Resources, on the other hand, is the largest oil producer in the Lower 48, with average net daily production of 551 thousand barrels of crude oil equivalent. The company is reputed for technological leadership in the development of unconventional resource plays.

The combination of EOG Resources’ strong technical competencies with the massive resource potential of the Yates acreage is expected to create significant value for shareholders of both companies. In particular, EOG Resources' inventory of premium drilling locations will grow by 40% as Yates immediately adds an estimated 1,740 net premium drilling locations in the Delaware Basin and Powder River Basin. (Read more: EOG Resources to Combine with Yates; Deal Valued at $2.5B.)

4.    San Antonio, TX-based refiner Tesoro Corp. announced that it has decided to purchase the Madison, WI-based renewable fuels and chemical company, Virent. The deal – whose terms were not disclosed – is intended to support the latter in bringing biofuels technology to commercial scale.

Per the agreement, Tesoro will provide resources and expertise to Virent in order to help the company scale up and commercialize its BioForming technology for the production of low carbon bio-based fuels and chemicals.

Moreover, Tesoro expects the addition of Virent will help it to lower costs in compliance with the federal renewable fuel standard and California`s low carbon fuel standard. (Read more: Tesoro Agrees to Acquire Renewable Fuels Company Virent.)

5.    Brazil's troubled state-run energy giant Petrobras (PBR - Free Report) reported that it has finally reached an accord to sell a 90% stake in its natural gas pipeline and storage unit, Nova Transportadora do Sudeste. This subsidiary of Petrobras is responsible for operating 2,700 kilometers of pipelines in the south of the country.

The stake is being sold to Canadian investment fund, Brookfield Asset Management Inc. for an undisclosed amount. However, sources with knowledge of the matter estimate the transaction value to be around $5.2 billion.

This deal, which is slated to close by the end of this month, is in line with the company’s plan to divest assets worth $15.1 billion by 2016 to reduce its debt. Petrobras will have to undertake asset sales worth $6 billion to reach its goal after the sale of Nova Transportadora. (Read more: Petrobras to Sell Majority Stake in Pipeline Unit to Brookfield.)

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

-0.75%

+5.92%

CVX

+0.08%

+8.48%

COP

+2.20%

+6.65%

OXY

-3.30%

+9.85%

SLB

-1.48%

+7.30%

RIG

-0.10%

-12.88%

VLO

-0.24%

-13.22%

TSO

+6.16%

-5.98%

Over the course of last week, ‘The Energy Select Sector SPDR’ was up 0.46% amid the largest crude supply decrease since 1999. Consequently, investors witnessed buying in most market heavyweights. The best performer was downstream operator Tesoro Corp. that added 6.16% to its stock price.

Longer-term, over the last 6 months, the sector tracker has jumped 13.62%. U.S. energy explorer Occidental Petroleum Corp. (OXY - Free Report) was the main beneficiary during this period, experiencing a 9.85% 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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