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Analyst Blog

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

On the news front, with earnings taking center stage yet again, the major headlines came from EOG Resources Inc. (EOG - Free Report) and Apache Corp.’s (APA - Free Report) third-quarter results, wherein they battled plunging commodity prices to report contrasting numbers.

Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures dived 9.5% to close at $44.07 per barrel, while natural gas prices ended down 10.9% to $2.767 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: XOM & CVX Beat Q3 Earnings, BHI to Merge with GE Unit.)

Oil prices sank to their lowest in more than six weeks as investors remained anxious about the OPEC and non-OPEC players’ commitments to slash production targets. With divisions in the cartel becoming apparent, the future of the ambitious OPEC announcement looks more and more uncertain. In particular, regional heavyweights and sworn enemies – Saudi Arabia and Iran – continue to be at loggerheads with threats that neither would yield an inch to the other. 

Adding to the pessimism was the U.S. Energy Department's weekly inventory release, which showed a record build in domestic crude stockpiles.

Meanwhile, natural gas also turned sharply lower despite a lower-than-anticipated inventory build. The commodity was hampered by a warmer-than-normal autumn weather that translates into weak demand.

Recap of the Week’s Most Important Stories

1.    Independent energy explorer EOG Resources Inc. reported wider-than-expected third-quarter 2016 loss. The underperformance could be attributed to attributed to lower production as well as weaker oil and gas prices.

In the quarter, EOG Resources’ total volume dipped almost 3% from the year-earlier level to 51.1 million barrels of oil equivalent. Average price realization for crude oil and condensates was down almost 5% year over year to $43.63 per barrel. Natural gas was sold at $1.95 per thousand cubic feet (Mcf), down 19% year over year.

In some positive news, EOG’s per-unit lease and well expenses fell 18%, while transportation costs also decreased from the prior-year period.

EOG Resources’ fourth-quarter daily production is expected between 562.7 thousand barrels of oil equivalent (MBoe) and 591.8 MBoe. For the full year, EOG Resources projected daily output in the range of 554.9–562.2 MBoe as against the prior projection of 533.5–551.5 MBoe. The company increased its capital expenditure budget to $2.6–$2.8 billion from the prior estimation of $2.4–$2.6 billion. (Read more: EOG Resources Incurs Wider-than-Expected Q3 Loss.)

2.    U.S. energy firm Apache Corp. reported third quarter loss per share – excluding one-time items – of 3 cents, narrower than the Zacks Consensus Estimate of a loss of 11 cents. The beat stems from cost savings.

Revenues of $1,438 million were above the Zacks Consensus Estimate of $1,382 million but came 6% below the year-ago level amid low commodity prices and a dip in output.

Apache– like many other oil and gas players – has adjusted its spending plans considerably amid diving crude prices. During Jul-Sep period, Apache’s exploration and development investments totaled $408 million, 49% lower than the $807 million incurred a year ago. Apache’s third quarter lease operating expenses totaled $382 million, down 15% from the year-ago quarter. Total costs and expenses fell 60% from the third quarter of 2015 to $2,343 million. (Read more: Apache Q3 Loss Narrower than Expected, Sales Beat.)

3.    Houston, TX-based upstream energy firm Marathon Oil Corp. (MRO - Free Report) posted second-quarter adjusted loss of 11 cents per share, narrower than the Zacks Consensus Estimate for a loss of 19 cents. Lower total expenses led to the outperformance. Contribution from Equatorial Guinea and Oklahoma Resource Basins' also supported the results. The positives were offset partially by lower commodity prices.

The company’s exploration expenses for the quarter of $83 million were significantly lower than $585 million in the year-earlier quarter. Moreover, Marathon Oil’s total quarterly cost and expenses fell 40.2% to $1,432 million. (Read more: Marathon Oil Posts Narrower-than-Expected Q3 Loss.)

4.    Chinese energy giant PetroChina Co. Ltd. (PTR - Free Report) announced third quarter 2016 earnings of RMB 1.2 billion or RMB 0.01 per diluted share, compared with RMB 5.2 billion or RMB 0.03 per diluted share a year earlier. Earnings per ADR came in at 15 cents, failing to beat the Zacks Consensus estimate of 29 cents. Moreover, China’s dominant oil and gas producer’s total revenue for the three months under consideration fell 4% from the comparable 2015 period to RMB 411.4 billion.

The negative comparisons can be primarily attributable to continued collapse in oil prices, which pummeled its biggest unit – exploration and production – to a loss.

As of Sep 30, 2016, PetroChina’s cash balance was RMB 120.8 billion, while net cash flow from operating activities was RMB 190.9 billion for the first three quarters of this year. Capital expenditure for the period reached RMB 114.1 billion, down 23% from the year-ago level of RMB 147.9 billion. (Read more: PetroChina Q3 Earnings Battered by Crude Plunge.)

5.    Chevron Corp. (CVX - Free Report) , the second-largest U.S. oil producer, yielded first gas from Alder field – a gas condensate field in the Central North Sea. Chevron currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Alder project is an initiative by Chevron North Sea Ltd. and leading integrated energy player ConocoPhillips. Chevron's subsidiary – Chevron North Sea –  is the operator of the field with a 73.7% interest in the project. The remaining 26.3% is held by ConocoPhillips.

The field is forecast to have a capacity of 110 million cubic feet per day of natural gas and 14,000 barrels per day of liquid condensate. All the production from this field – located about 100 miles off of Scotland – will be sent to the ConocoPhillips operated Britannia platform via a 17-mile pipeline.

The Alder project complements Chevron’s strategy of investing and developing resources in the U.K., enhance the production capacity of its portfolio and increase the field life of Britannia – a vital asset of Chevron in the North Sea. (Read more: Chevron Corp. Produces First Gas from Alder.)

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

-4.00%

-4.37%

CVX

+1.93%

+6.48%

COP

+1.81%

+5.45%

OXY

-10.86%

-10.97%

SLB

-3.38%

+9.59%

RIG

-5.32%

-2.31%

VLO

-2.79%

+6.44%

TSO

-4.63%

+6.23%

Over the course of last week, ‘The Energy Select Sector SPDR’ was down by 3.01% on doubts over the OPEC output deal. Consequently, investors witnessed heavy selling in most market heavyweights. The worst performer was domestic oil and gas explorer Occidental Petroleum Corp. (OXY - Free Report) whose stock price fell 10.86%.

But longer-term, over the last 6 months, the sector tracker has gained 7.63%. Oilfield services behemoth Schlumberger Ltd. (SLB - Free Report) was one of the major beneficiaries during this period, experiencing a 9.59% price increase.

What’s Next in the Energy World?

With bulk of the Q3 earnings season now behind us, market participants will be again 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 and the upcoming Presidential election.

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