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Analyst Blog

It was a week where oil prices marked its highest close since July 2015 and natural gas futures surged on cold weather. 

On the news front, American energy giant Chevron Corp. (CVX - Free Report) decided to unload its geothermal fields in Indonesia and the Philippines, while Brazil’s Petrobras (PBR - Free Report) is selling $2.2 billion in upstream and downstream assets to France’s TOTAL SA (TOT - Free Report) .

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures edged up 0.1% to close at $53.02 per barrel, while natural gas prices jumped 7.2% to $3.3320 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: ExxonMobil's CEO Transition, BP's Oil Deal and More.)

Oil prices ticked modestly higher to settle at a 52-week high as traders and analysts grow more confidant that producers will adhere to their agreed output cut quotas, which will reduce the global inventory glut next year. However, the potential return of supply from Libya, an unexpected build in U.S. crude inventories and a burgeoning rig count kept prices in check.

Oils-Energy Sector 5YR % Return

 

Oils-Energy Sector 5YR % Return

Meanwhile, natural gas turned sharply higher following a bigger-than-expected withdrawal. The commodity was further buoyed by the ongoing cold snap that translates into strong demand for the heating fuel.

Recap of the Week’s Most Important Stories

1.    U.S. energy behemoth Chevron Corp. reported that its wholly-owned affiliates have signed an agreement to divest its Indonesian and Philippines Geothermal assets – earlier valued at $3 billion – to Star Energy Consortium.

Chevron, which first began its geothermal operations in the 1960s, has a 40% interest in the Philippine Geothermal Production Company. This company operates the Tiwi and Mak-Ban geothermal power plants in Southern Luzon that provide steam to power plants and are capable of generating 692 megawatts of power. The Darajat and Salak fields in Indonesia – founded by Chevron in the 1980s – have a combined operating capacity of 647 megawatts.

The geothermal asset sales are part of Chevron’s efforts to shore up its financial condition amid weak commodity prices. The company has already sold assets worth $2.2 billion as of the end of the third quarter and is on track to attain its goal of maximizing the value of its upstream businesses by managing its portfolio effectively.

2.    Brazil's state-run energy giant Petrobras entered into an agreement with France’s TOTAL SA to divest assets worth $2.2 billion. The divestment includes stakes in oilfields and two thermal power stations.

Per the agreement, Petrobras will receive cash of $1.6 billion post the closure of the deal. The remaining amount will be received over the length of the partnership with TOTAL. Moreover, the agreement gives Petrobras an option to buy a stake in a Gulf of Mexico field owned by TOTAL and ExxonMobil Corp.

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 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 2015–2016 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 and TOTAL Sign Asset Sale Deal Worth $2.2B.)

3.    Independent oil and natural gas exploration and production company Anadarko Petroleum Corp. (APC - Free Report) announced that it has agreed to sell its operated and non-operated upstream assets and operated midstream assets in Marcellus Shale in north-central Pennsylvania to Alta Marcellus Development, LLC, a wholly owned subsidiary of Alta Resources Development, LLC, for nearly $1.24 billion.

The divestiture covers nearly 195,000 net acres, which had generated sales volumes of 469 million cubic feet per day in the third quarter of 2016. The transaction is expected to close in the first quarter of 2017, subject to necessary approvals.

To focus on high-return assets and improve capital efficiency, Anadarko has been systematically selling its non-core properties since 2004. Keeping with this, year to date, the company has announced or closed monetization in excess of $5 billion.

The divestment of these assets will allow Anadarko to focus on its oil-levered assets in the Delaware and Denver-Julesburg (DJ) basins. (Read more: Anadarko to Sell Marcellus Shale Assets to Alta Resources Unit.)

4.    Energy explorer Chesapeake Energy Corp. (CHK - Free Report) inked an agreement to divest a portion of its acreage to an affiliate of Covey Park Energy LLC for about $465 million.

The assets to be divested include producing properties in its Haynesville Shale operating area in northern Louisiana, which span across a net acreage of 41,500 and comprise 326 operated and non-operated wells that currently produce about 50 million cubic feet (mmcf) of gas per day, net to Chesapeake. The transaction is anticipated to close in the first quarter of 2017.

We note that the company has exceeded its 2016 asset divestment target by about $500 million, which brings the total gross proceeds from divestitures to about $2.5 billion. Chesapeake intends to continue its pursuit of strengthening its balance sheet and the Haynesville asset divestment is in sync with its strategy. (Read more: Chesapeake to Sell Haynesville Assets for $465 Million.)

5.    Schlumberger Ltd. (SLB - Free Report) recently declared that it has inked two accords with Transocean Ltd. (RIG - Free Report) to provide services for pressure control equipment management over a period of ten years. The value of the deals is estimated at more than $350 million. Transocean currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Per the first agreement, Schlumberger will handle Transocean’s Cameron risers in the Gulf of Mexico. The contact also comprises activities like storage, maintenance, inspection, repair, recertification and data-driven riser management of rigs.

According to the second deal, Schlumberger will give solutions for the maintenance of blowout preventer systems and associated pressure control equipment for nine ultra-deepwater rigs -- capable of drilling in harsh environments -- of Transocean.

Schlumberger believes that the agreements will likely improve the uptime of pressure control equipment. The accords will also lower the total cost of ownership for offshore equipment. (Read more: Schlumberger Inks Twin Agreements with Transocean.)

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

-0.50%

+1.48%

CVX

+2.07%

+16.21%

COP

-0.83%

+18.99%

OXY

+3.19%

-4.20%

SLB

+1.14%

+11.54%

RIG

+1.17%

+30.70%

VLO

+3.76%

+31.20%

TSO

+0.83%

+20.82%

Over the course of last week, ‘The Energy Select Sector SPDR’ was down 0.07%. The worst performer was Houston, TX-based energy explorer ConocoPhillips whose stock price fell 0.83%.

But longer-term, over the last 6 months, the sector tracker has gained 14.74%. Downstream operator Valero Energy Corp. was one of the major beneficiaries during this period, experiencing a 31.20% price increase.

What’s Next in the Energy World?

In this holiday-shortened week, market participants will be closely tracking the regular 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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