It was a week where both oil and gas prices ended with substantial gains.
On the news front, acquisitions and deals were in focus with pipeline operator Sunoco Logistics Partners L.P. agreeing to acquire larger rival Energy Transfer Partners L.P. (ETP - Free Report) for $21 billion. Meanwhile, downstream bellwether Tesoro Corp. (TSO - Free Report) signed a deal to buy fellow oil refiner Western Energy Inc. for about $6.4 billion.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures added 5.3% to close at $45.69 per barrel, while natural gas prices rallied 8.6% to $2.843 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell to Invest $10B in Brazil, Chevron Starts Angola Project.)
Oil prices notched up their first weekly gain in a month on growing conviction that OPEC members will agree next week to rein in output as part of the plan reached in Sep. The commodity was also bolstered by reports suggesting Russia’s willingness to back the oil cartel’s decision to curb production.
However, the bullish sentiment was partly offset by the U.S. Energy Department's weekly inventory release, which showed an unexpected build in crude stockpiles.
Meanwhile, natural gas also turned sharply higher following forecasts of colder weather that translates into strong demand for the heating fuel.
Recap of the Week’s Most Important Stories
1. Energy pipelines and terminals operator Sunoco Logistics Partners L.P. entered into an agreement to acquire rival pipeline firm Energy Transfer Partners L.P.in a unit-for-unit transaction worth $21.3 billion.
Under the terms of the transaction, unitholders of Energy Transfer will receive 1.5 common units of Sunoco for each common unit of Energy Transfer they own. Post the merger, Dallas-based Energy Transfer Partners will remain the overall parent of the combined entity. The deal is expected to close early next year, subject to approval by shareholders of Energy Transfer, and other customary closing conditions.
This merger is expected to create several commercial synergies, and result in $200 million worth of annual costs savings by 2019. The transaction is also expected to strengthen the financials of the combined organization by making use of cash distribution savings to lower debt and to finance a portion of the growth capital expenditure programs of the combined entity.
2. Downstream operator Tesoro Corp. has agreed to acquire El Paso, TX-based fellow oil refiner Western Energy Inc. for about $6.4 billion. The deal has been unanimously okayed by both companies’ boards but is subject to shareholder and regulatory approvals. Tesoro and Western Refining expect to close the transaction in the first half of 2017.
As per the deal, Western Refining shareholders would have the option to receive $37.30 in cash or 0.4350 shares of Tesoro common stock for each share they hold, representing a total value of $4.1 billion. At Western Refining’s Wednesday’s closing stock price of $30.50, the deal values the company’s shares at 22% premium. Additionally, Tesoro will assume $1.7 billion in debt and shell out another $605 million for a non-controlling stake in Western Refining Logistics L.P. – the fee-based limited partnership formed by Western Refining.
The acquisition is expected to transform Tesoro into a downstream powerhouse that will account for about 6% of crude processing capacity in the U.S. with attractive exposure to the prolific Permian Basin of West Texas, an area that continues to be profitable even at the current low oil prices. (Read more: Tesoro Set to Snap Up Western Refining in $6.4 Billion Deal.)
3. Upstream energy firm Whiting Petroleum Corp. (WLL - Free Report) has signed a purchase and sale agreement to divest 50% stake in its North Dakota-based Robinson Lake natural gas processing plant. The company has also signed an agreement to sell 50% interest in Belfield natural gas processing plant and associated natural gas, crude oil and water gathering systems. Whiting Petroleum currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Both the Robinson Lake and the Belfield natural gas processing plant reported an average daily throughput of 132 MMcf per day for the second and third quarters of 2016. These North Dakota assets, which are jointly owned by Whiting Petroleum and Gas Corp., consist of over 650 miles of crude oil, natural gas and other gathering pipelines.
Independent refiner Tesoro Corp.’s master limited partnership Tesoro Logistics L.P. will be purchasing these assets for about $700 million. Whiting Petroleum’s share of sale price is estimated to be approximately $375 million.
4. Contract drilling services provider Helmerich & Payne Inc. (HP - Free Report) reported net operating loss per share for the fourth fiscal quarter of 2016 (three months ended Sep 30, 2016) – excluding special items – of 33 cents, narrower than the Zacks Consensus Estimate for a loss of 43 cents. The outperformance came on the back of greater operational efficiency and lower operating costs, which decreased by approximately 27% to $424.7 million.
However, the bottom line compared unfavorably with the year-ago adjusted profit of 4 cents amid sharply lower drilling activity.
During the quarter, Helmerich & Payne spent approximately $37.6 million on capital programs bringing the full-year figure to $257.2 million. As of Sep 30, 2016, the company had approximately $905.6 million in cash, while long-term debt stood at $491.8 million (debt-to-capitalization ratio of 9.7%). (Read more: Helmerich & Payne Posts Narrower-Than-Expected Q4 Loss.)
5. Brazil's state-run energy giant Petrobras (PBR - Free Report) announced its decision to divest its liquefied petroleum gas unit Liquigás Distribuidora SA for $819 million. The segment, which distributes cooking gas, will be sold to Ultrapar Participacoes SA – a fuel and petrochemical holding firm. The deal has received clearance from Petrobras’ board but is awaiting approval from Brazil´s antitrust agency – CADE
The divestment plan is in sync with Petrobras’ efforts to lower its huge debt burden. In fact, the company is the most indebted in the world with a debt burden of $122.65 billion at the end of third-quarter 2016. As a result, Petrobras intends to divest assets worth as much as $15.1 billion over the 2015–2016 period and another $19.5 billion over 2017–2018. Through these initiatives, the company expects to achieve a net debt-to-EBITDA ratio of 2.5 times in 2018 as against 5.3 times at year-end 2015. (Read more: Petrobras to Lower Debt with Liquigas Distribuidor Sale.)
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 6 Months
Over the course of last week, ‘The Energy Select Sector SPDR’ was up 0.78% thanks to expectations for an OPEC output deal. Consequently, investors witnessed buying in most market heavyweights. The best performer was offshore drilling giant Transocean Ltd. whose stock price jumped 8.49%.
Longer-term, over the last 6 months, the sector tracker has gained 10.35%. Again, Transocean was one of the major beneficiaries during this period, experiencing a 28.84% price increase.
What’s Next in the Energy World?
With 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.
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