It was a week where oil prices dropped to the lowest close since May 10 amid the U.S. climate pact withdrawal, while a bearish build created selling pressure on natural gas futures and pushed the commodity below the psychological $3 per MMBtu mark.
On the news front, London-based offshore driller Ensco plc (ESV - Free Report) is set to buy U.S. rival Atwood Oceanics Inc. in an all-stock transaction worth some $839 million, while Energy Transfer Partners L.P. (ETP - Free Report) -sponsored $3.8 billion controversial Dakota Access Pipeline began commercial operations on Jun 1.
Overall, it was another dismal week for the sector. West Texas Intermediate (WTI) crude futures fell 4.3% to close at $47.66 per barrel, while natural gas prices lost 9.4% to $2.999 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Tesoro's Drilling JV, SeaDrill's Q1 Beat & More.)
Oil prices took a tumble to end Friday at a more than 3-week low. The Trump administration’s decision to opt out of the Paris climate change accord caused bulk of the profit-taking as this could encourage more oil drilling in the U.S., possibly intensifying the global supply glut. Investors also fretted over the continued rise in domestic production thanks to soaring shale output.
These narratives more than offset EIA’s bullish storage report, which showed that crude stockpiles declined for the eighth straight week, continuing to drag down the overall surplus. Moreover, gasoline inventories dropped sharply ahead of the start to the summer driving season and refiners processed a record amount of crude.
Meanwhile, natural gas fared worse and turned sharply lower following a larger-than-expected storage build. The commodity was also undone by the absence of any heat waves to spur cooling demand for the fuel.
Recap of the Week’s Most Important Stories
1. Oil and natural gas driller Ensco plc revealed its plan to acquire smaller rival Atwood Oceanics Inc. in an all-stock deal worth $839 million, whetting investors' appetite for consolidation in the struggling sector.
As per the deal, Atwood shareholders would receive 1.60 shares of Ensco common stock for each share they hold. At Atwood’s Friday’s closing stock price of $8.08, the deal values the company’s shares at 33% premium. The deal has been unanimously okayed by both companies’ boards but is subject to shareholder and regulatory approvals.
Ensco and Atwood expect to close the transaction sometime in the third quarter of 2017. The current stockholders of Ensco will own approximately 69% of the combined company, with Atwood shareholders owning the rest. Following the announcement, Atwood stock surged 24%, while shares of London-based Ensco fell about 5%.
The transaction will meaningfully diversify Ensco's offerings of products and services. The combined group will have a market capitalization of about $7 billion, supplying offshore drilling rigs across varying water depths spread over six continents to the world's largest energy groups. Ensco, one of the strongest players in the oil drilling sector, will get access to Atwood's six ultra-deepwater floaters, including four drillship and five high-specification jackups. (Read more: Ensco to Acquire Atwood in All-Stock Deal Worth $839M.)
2. Disregarding criticism from the Native American tribes and environmental groups, Texas-based pipeline operator Energy Transfer Partners L.P.’s $3.8 billion project-Dakota Access Pipeline became operational on Jun 1.
The 1,172-mile-long pipeline will carry oil between North Dakota and Illinois, where the crude will be transported to the refineries on the Gulf Coast or East Coast. With a capacity to carry about 520,000 barrels of oil per day, the pipeline is likely to bridge the gap between Bakken players and producers in other U.S. oil producing areas like the Williston and Permian basins.
The pipeline is likely to help in improving the region’s drilling economics by lowering transportation costs for operators. The commencement of the pipeline’s service is likely to speed up the revival of Bakken output which plunged with the sharp fall in crude prices. Large operators like Hess Corp. and Oasis Petroleum Inc. are counting on the Dakota Access Pipeline to send a major portion of their product to market.
On the flip side, the pipeline has already leaked at least three times and there is still no oil spill response plan in place. Without a proper emergency response plan, further spills may cause severe environmental damage. (Read more: Energy Transfer's Dakota Access Pipeline Comes Online.)
3. Oil refining and marketing giant Marathon Petroleum Corp. (MPC - Free Report) recently announced that its board has authorized an additional buyback program of shares worth $3 billion. The company still has approximately $2.14 billion remaining from its previous authorization. Marathon Petroleum currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Marathon Petroleum plans to fund the buyback program with cash proceeds from dropdowns and limited partner distributions. The decision falls in line with the company’s value creation strategy of increasing capital return to the shareholders. The company had 518.74 million shares outstanding as of now.
Marathon Petroleum has various options to commence the buyback program including accelerated share repurchases, negotiated block transactions and open market repurchases.
As part of its investor-friendly policy, the company has returned approximately $11 billon to its shareholders through the buyback programs. To date, Marathon Petroleum has repurchased 30% of its outstanding common shares. (Read more Marathon Petroleum to Buy Back Shares Worth Up to $3B.)
4. European oil giant Royal Dutch Shell plc (RDS.A - Free Report) is set to increase its natural gas-rich holdings in the Republic of Trinidad and Tobago. The company recently inked a $250 million deal with the U.S. integrated major, Chevron Corp. (CVX - Free Report) , to acquire most of the latter’s gas-related assets in the twin-island Caribbean nation.
Per the deal, Shell will buy all the shares of Chevron’s local subsidiary, Chevron Trinidad and Tobago Resources SRL, including 50% stake in three offshore natural gas fields in the East Coast Marine Area in blocks E, 6 and 5(a). The average daily production of natural gas from these three fields — Dolphin, Dolphin Deep and Starfish — was 74 million cubic feet in 2016.
Shell will also acquire part of Chevron’s stake in the Manatee cross-border gas field shared with neighboring Venezuela. However, Chevron will retain its interest in the block on the Venezuelan side of the border. Furthermore, Shell will purchase Chevron’s entire stake in Trinling Ltd. LNG transportation and marketing company.
The deal is a prudent move as it enhances Shell’s integrated gas position in Trinidad and Tobago. The acquisition of natural gas fields will help the company to secure new competitive production opportunities. The purchase of stakes in Trinling Ltd will further allow Shell to integrate its operations smoothly. (Read more: Shell Inks Deal with Chevron to Expand Holdings in Trinidad.)
5. Downstream operator Tesoro Corp. recently announced the much-awaited completion of $6.4 billion acquisition of Texas-based oil refiner Western Refining Inc.
The combined company – to be headquartered in San Antonio – will be now be officially called Andeavor and is likely to begin trading on NYSE under a new ticker, ANDV, effective Aug 1. Tesoro’s master limited partnership, Tesoro Logistics L.P. would change its name to Andeavor Logistics LP., with the new ticker symbol ANDX. The new name will not extend to the company's 3,000 retail locations, which will continue to carry the Tesoro brand.
The acquisition will allow Tesoro to increase its refining capacity to more than 1.1 million barrels per day (or about 6% of the nation’s crude processing capacity) from a total of 10 refineries in eight states, making it the fourth-largest independent U.S. refiner. The combined company will have more than 3,000 retail gas stations, 13,000 employees and 4,800 miles of pipelines. The company is expected to deliver cost synergies of $350 million to $425 million within the first two years, generating substantial stockholders value. (Read more: Tesoro Closes Western Refining Merger, To Be Named Andeavor.)
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 – a popular way to track energy companies – fell by 4.26%. The worst performer was offshore drilling giant Transocean Ltd. whose stock price plunged 15.61%.
Longer-term, over the last 6 months, the sector tracker is down 13.46%. Transocean was again the major laggard during this period, experiencing a 36.35% price decline.
What’s Next in the Energy World?
Market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.
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