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Nilanjan Choudhury

Oil & Gas Stock Roundup: Rice Energy's Acquisition, Schlumberger's Venezuela Contract

PBR TSO SLB CVX XOM TRP RICE

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It was a week which saw oil prices retest the psychologically important $45 per barrel level, while natural gas futures briefly climbed to a 20-month high.

On the news front, domestic energy explorer Rice Energy Inc. (RICE - Free Report) has struck a deal to buy fellow independent Vantage Energy for approximately $2.7 billion, while oilfield services major Schlumberger Ltd. (SLB - Free Report) won a huge new contract with Venezuela's state oil company.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures added 2% to close at $44.48 per barrel, while natural gas prices edged up by a meagre 0.2% to $2.955 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Anadarko Buys GoM Assets, Encana Unveils $1B Share Sale Plan.)

Oil prices notched up a weekly gain after the U.S. Energy Department's inventory release showed that crude stockpiles recorded a surprise drop. As per the federal government’s EIA report, oil inventories decreased by a massive 6.2 million barrels for the week ending Sep 16, 2016.

A relatively strong refining activity for this time of year led to the big stockpile drawdown with the world's biggest oil consumer. Following the third consecutive unexpected weekly inventory decline, the current supplies – at 504.6 million barrels – are at their lowest level in 7 months.

Apart from the bullish government data, oil prices were also supported by the decision by Federal Reserve not to raise interest rates. As widely expected, the U.S. central bank opted to leave the current 0.25-0.50 rate unchanged. This led to dollar weakness that made the greenback-priced crude more affordable for investors holding foreign currency.

The commodity was also helped by heightened expectations that prominent oil producing countries may make headway on a production freeze deal. Statements made by various members of OPEC over the weekend suggested that an agreement could be arrived at.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Meanwhile, natural gas eked out a miniscule gain following another below-average build – the 20th in a row – which further narrowed the supply overhang. But to a large extent, this was offset by predictions of tepid demand with sudden change in forecasts that showed cooler weather ahead.

Recap of the Week’s Most Important Stories

1.    Upstream energy player Rice Energy Inc. recently announced its decision to acquire Vantage Energy for roughly $2.7 billion, including debt.

The acquisition – likely to conclude by the fourth quarter – will provide Rice Energy access to 231,000 net acres in the Marcellus and Ohio Utica with roughly 1,164 drilling locations. Following the deal, the company has increased its 2016 exploration and production capital budget to $735 million from $660 million.

During the second quarter, net production from the assets came in at 399 million cubic feet equivalent per day. Rice Energy added that it will drop down a part of the acquired midstream properties – which include 30 miles of dry gas gathering and compression properties – to Rice Midstream Partners LP for a consideration of $600 million.

2.    Oilfield services provider Schlumberger Ltd. has been contracted for a major drilling project in Venezuela. The said pact is for one of the world's largest drilling projects for Venezuela's national oil company Petroleos de Venezuela S.A. (or PDVSA). Reportedly, the latter is planning to drill a total of 480 new wells in the Orinoco region, targeting an extra 250,000 barrels of oil per day over the next 30 months.

Per the agreement, Schlumberger will be responsible for drilling 80 wells in an extra-heavy oil field in the Orinoco Belt as part of a $3.2 billion project. It is to be noted that Schlumberger will be the only public company among the three contractors for the major project.

This project is quite an exception to Schlumberger’s recent strategy of cutting back on its projects in Venezuela due to worsening payment delays by PDVSA. Also, since 2014, the company has shed more than $500 million in Venezuelan assets. (Read more: Schlumberger Awarded Drilling Contract in Venezuelan Project.)

3.    U.S. supermajor Exxon Mobil Corp.’s (XOM - Free Report) $2.5 billion bid to acquire Singapore's InterOil Corp. was approved by the shareholders of the latter. The merger, which required approval by two-thirds of InterOil shareholders, saw more than 80% of the shareholders vote in favor of the proposed transaction. Exxon Mobil currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In Jul, Exxon Mobil had placed a bid for InterOil to enhance its liquefied natural gas position in Papua New Guinea. Exxon Mobil had managed to outbid French energy giant Total SA backed Oil Search’s offer of about $2.2 billion to buy part of InterOil's stake in the potentially lucrative Elk-Antelope gas field. The bidding war came to an end as Oil Search abandoned its pursuit of InterOil owing to a weaker balance sheet than its rival.

With the deal receiving the approval of InterOil shareholders, the merger is left with only its final hurdle – the transaction needs to be okayed by the Supreme Court of Yukon, where InterOil is established. After this approval, Exxon Mobil, which now has a 33% share of the Papua New Guinea liquid natural gas project, will receive an additional 36.5% stake as part of the merger. (Read more: Exxon Mobil Merger Deal on Track, InterOil Shareholders Vote.)

4.    Major North American energy infrastructure company TransCanada Corp. (TRP - Free Report) announced that it has offered $848 million to buy Columbia Pipeline Partners L.P., the master limited partnership affiliate of its newly acquired Columbia Pipeline Group Inc. unit.

The Canadian oil company also announced its intention to take control of the other 53.8 million outstanding units in Columbia Pipeline Partners for $15.75 per common unit. The offer signifies a premium of about 3% over the limited partnership closing price of $15.30 on Sep 23, 2016.

In Jul, TransCanada purchased the Columbia Pipeline Group Inc. unit for $13 billion, which included debt of $2.8 billion. The Canadian pipeline operator has been reviewing its strategic options for its master limited partnership holdings ever since.

5.    Brazil's troubled state-run energy giant Petrobras (PBR - Free Report) declared a steep cut its capital spending budget for the period 2017–21. The company also announced its intention to accelerate disposal of assets over the same duration.

The largest integrated energy firm in Brazil reduced its five-year capital budget for the 2017–21 period by nearly 25% or $24.3 billion to $74.1 billion. Of the total, 82.5% will be allocated toward E&P activities. The company had projected capital budget of $98.4 billion at the beginning of this year. Notably, the previous estimation was also lower than $130.3 billion declared in 2015.

For the 2015–16 period, Petrobras reaffirmed plans of asset sales worth as much as $15.1 billion. The company intends to raise an additional $19.5 billion through divestments and partnerships between 2017 and 2018. Petrobras also foresees sale of assets worth $40 billion over the next 10 years. Through these divestments, the company intends to reduce debt and exit from peripheral businesses such as biofuels, fertilizers and petrochemicals to focus on the most profitable deep water projects. (Read more: Petrobras Revises 5-Year Plan, Cuts Spending by 25%.)

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

-1.00%

-1.38%

CVX

+0.92%

+4.33%

COP

+2.09%

+0.86%

OXY

-1.98%

+1.90%

SLB

-0.46%

+3.82%

RIG

-1.51%

+2.26%

VLO

+0.73%

-16.78%

TSO

+3.77%

-9.07%

Over the course of last week, ‘The Energy Select Sector SPDR’ was up 0.40% thanks to a third consecutive weekly drop in domestic supplies and a weaker dollar. Consequently, investors witnessed buying in most market heavyweights. The best performer was downstream operator Tesoro Corp. (TSO - Free Report) that added 3.77% to its stock price.

Longer-term, over the last 6 months, the sector tracker has gained 9.48%. U.S. energy major Chevron Corp. (CVX - Free Report) has been one of the beneficiaries during this period, experiencing a 4.33% 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 as well as Wednesday’s OPEC meeting in Algeria.

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