Back to top

Analyst Blog

Nilanjan Choudhury

Oil & Gas Stock Roundup: Transocean's Contract Termination, Marathon Oil's Asset Sale


Trades from $3

It was a week which saw oil prices surge on OPEC action, while natural gas futures turned lower on weather worries.

On the news front, offshore contract drilling service provider Transocean Ltd. (RIG - Analyst Report) suffered early termination of a drillship contract, while domestic explorer Marathon Oil Corp. (MRO - Analyst Report) agreed to sell non-core assets in West Texas and New Mexico for $235 million.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures rallied 7.8% to close at $48.24 per barrel, while natural gas prices fell by 3.6% to $2.906 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here:  Rice Energy's Acquisition, Schlumberger's Venezuela Contract.)

Oil prices notched up a big weekly gain as investors were impressed by a decision from the world's largest oil cartel to slash production targets.

The Organization of Petroleum Exporting Countries (OPEC), whose member nations supply around 40% of the world's crude, said it would cut production by as much as 750,000 barrels a day starting in November in order to keep oil prices from falling further. Most industry observers didn’t have high expectations from the meeting.

Apart from the OPEC announcement, oil prices were also supported by the U.S. Energy Department's weekly inventory release, which showed that crude stockpiles declined for the fourth straight week, continuing to drag down the overall surplus.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Meanwhile, natural gas settled down despite another below-average build – the 21st in a row. The commodity was overwhelmed by predictions of tepid air conditioning demand with forecasts that showed cooler weather ahead.

Recap of the Week’s Most Important Stories

1.    Offshore drilling giant Transocean Ltd. saw its shares decline 7.6% in the after-hours trading session on October 3 after India-based Reliance Industries Ltd. decided to exercise the option to terminate its contract for Transocean's Discoverer India rig ahead of schedule.

The ultra-deepwater drillship will be pulled out of service in Dec 2016, four years before the scheduled contract expiry in Jan 2021. Per the contract, Transocean will receive a lump sum compensation amount of approximately $160 million from Reliance for the early termination.

This is another sign that the collapse in crude prices that began in mid-2014 amid a glut of supply and slowing demand for the commodity has affected the offshore drillers badly as oil companies cut back their capital spending.

2.    Leading upstream energy player Marathon Oil Corp. reported that it has signed a deal to sell off some of its non-core assets in West Texas and New Mexico for $235 million.

Under this deal, Marathon will be seen divesting its non-operated, conventional CO2 and waterflood assets to an unidentified buyer by the end of this year. These assets averaged about 4,000 barrels of oil equivalent per day in the first half of 2016.

With oil prices remaining low for a long time and still hovering below $50 a barrel, exploration and production companies such as Marathon find it difficult to borrow funds from the lenders. Hence, this forces them to sell off their non-core properties to meet their expenses.

3.    British oil major BP plc (BP - Analyst Report) recently announced that it has struck an accord with the Egyptian government for the amendment of three concessions in the Arab country.

BP has secured amendments from the authorities for three concessions in Egypt – Temsah, Ras El Barr and Nile Delta Offshore. This will facilitate acceleration of output from the Nooros gas discovery after recording positive appraisal results from another find. Recently, BP achieved record production of 700 million standard cubic feet per day (mmscfd) in the Nooros development. BP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

With the conclusion of these amendments, BP can progress with the enhancement of its drilling activities in these concession areas. The amendments also allow fast track development of the Nooros field in the Nile Delta offshore concession and should allow the company to reach a production level of 800 mmscfd by early 2017. Additional wells are also expected to be drilled by BP in Ras El Barr and Temsah areas, which will likely bring substantial gas to the Egyptian domestic market. (Read more: BP Inks Three Concession Agreements with Authorities in Egypt.)

4.    Natural gas producer Chesapeake Energy Corp. (CHK - Analyst Report) declared the pricing of private placement of $1.1 billion convertible senior notes. The notes, which are scheduled to mature by 2026, will likely have an interest rate of 5.5%. The company has upsized the private placement from the earlier amount of $850 million.

Private placement generally means that the notes will be sold to few selected investors. In fact, Chesapeake motioned that the investors are qualified institutional buyers. Notably, initial purchasers will receive a 30-day option to buy up to an extra $150 million aggregate principal amount of notes.

Chesapeake is anticipated to close the private placement on Oct 5, 2016 upon fulfillment of customary closing conditions. The net proceeds from the offering will likely be utilized for general corporate activities like repurchase of debt and repayment of senior notes that are slated to mature in the near term. (Read more: Chesapeake Energy Upsizes, Prices Convertible Senior Notes.)

5.    Hamilton, Bermuda-based offshore drilling firm SeaDrill Ltd. (SDRL - Analyst Report) saw its shares decline after North Atlantic Drilling Ltd., in which it holds 70% stake, announced a rig contract cancellation by Norwegian oil giant Statoil ASA (STO - Analyst Report) .

This cancellation notice, which pertains to the contract for the West Epsilon jack-up, came two months before the expiration of the drilling contract between the parties. The West Epsilon rig was originally contracted to provide drilling services in Norway until Dec 2016. However, Statoil has now decided to conclude the rig’s current activities in mid-Oct.

As per the terms of the contract, North Atlantic Drilling is now entitled to receive a lump-sum payment of approximately $11 million because of the early termination. The West Epsilon, on the other hand, is currently being marketed for new contract. (Read more: SeaDrill Subsidiary Reports Rig Contract Cancellation.)

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.


Last Week

Last 6 Months

























Over the course of last week, ‘The Energy Select Sector SPDR’ was up 4.92% thanks to OPEC’s surprise move to cut oil production. Consequently, investors witnessed heavy buying in most market heavyweights. The best performer was offshore drilling giant Transocean Ltd. that added 16.65% to its stock price.

Longer-term, over the last 6 months, the sector tracker has gained 18.07%. Transocean was again one of the major beneficiaries during this period, experiencing a 15.20% 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.

Now See Our Private Investment Ideas

While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum  . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>