It was a week where oil prices dropped to the lowest close since May 4 amid a bearish inventory data, while supportive weather forecasts pushed natural gas futures higher.
On the news front, energy midstream operator SemGroup Corp. SEMG is set to buy oil terminal assets on Houston Ship Channel for $2.1 billion, while Canada-based Encana Corp. ECA and U.K’s Centrica plc CPYYY struck separate deals to sell natural gas properties.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 3.8% to close at $45.83 per barrel, natural gas prices gained 1.3% to $3.039 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Ensco Snaps Up Atwood, Dakota Access Pipeline in Service.)
Oil prices sank to a one-month low, spooked by the U.S. Energy Department's inventory release. The report revealed that crude stockpiles recorded an unexpected build after eight straight weekly draws. Moreover, refined product inventories – gasoline and distillate – both rose by significantly larger-than-expected amounts. Investors also fretted over the burgeoning rig count –pointing to the ever-increasing shale drilling activities.
Meanwhile, natural gas futures ticked higher despite a bigger-than-expected increase in supplies. Forecasts for warmer weather and the resultant expectations for strong demand helped the commodity eke out a small gain.
Recap of the Week’s Most Important Stories
1. Tulsa-based midstream player SemGroup Corp. recently clinched a $2.1 billion deal to acquire Houston Fuel Oil Terminal Co. from investment funds managed by Alinda Capital Partners. The agreement will advance SemGroup’s Gulf-Coast strategy and provide the company with ownership of one of the largest U.S. oil terminals. Scheduled to close in the third quarter of 2017, the pact would also enable SemGroup to gain ownership of about 330 acres along the Houston Ship Channel.
Houston Fuel Oil Terminal stores, blends and transports residual and crude oil via pipeline, ship, barge, rail and truck. With the capacity of 16.8 million-barrels, the Houston-based terminal along the U.S. Gulf Coast has extensive pipeline connectivity. The terminal is currently on its expansion phase having a number of projects underway. These include a new ship dock, a new pipeline and connections, as well as an additional 1.45 million barrels of crude oil storage, expected to be in service by mid-2018.
The addition of the Houston-based terminal is set to expand the geographical diversity and footprint of SemGroup, which currently owns assets in Colorado, Eagle Ford, North Texas, Oklahoma, North Dakota, Canada, Mexico and U.K. The terminal is also complementary to SemGroup’s existing assets in the middle of North America.
The deal would also enable SemGroup to gain synergies and leverage the well-established and long-tenured customer base. This in turn will boost shareholders value (Read more: SemGroup to Acquire Houston Fuel Oil Terminal for $2.1 B.)
2. Canadian natural gas producer Encana Corp. recently clinched a $735 million deal to offload assets in the Piceance Basin on Colorado’s Western Slope to Denver-based private upstream player Caerus Oil and Gas LLC for $735 million in cash. This marks the end of Encana’s 15 years run in the basin.
Per the agreement, Encana will divest over 550,000 leased acres and 3,100 operated wells. The assets produced about 240 million cubic feet per day of natural gas and 2,178 barrels per day of liquids in the first quarter of 2017, with estimated proved reserves of 814 billion cubic feet of gas equivalent at the end of 2016.
Further, Encana will also get rid of $430 million of contractual pipeline obligations, with Caerus taking over these commitments. Following the completion of the deal, around 140 employees working on Colorado’s Western Slope are likely to join Caerus.
The agreement – set to close in the third quarter – is in sync with the Encana’s strategy to streamline its portfolio and focus on its four chief asset plays – the Montney and Duvernay gas formations in British Columbia and Alberta and the Permian and Eagle Ford formations in Texas. The transaction will streamline the company’s portfolio through the sale of non-core assets and help them to refocus their production spending in core plays and fewer geographical areas.
In addition to the cash received, Encana will also benefit by reducing its midstream commitments by about $430 million. The sale of Piceance assets is likely to make Encana more efficient and strengthen financials. The proceeds from the sale are likely to be utilized by the company to repay the debt, which amounted to around $4.2 billion at the end of the first quarter.(Read more: Encana Inks $735M Deal to Offload Piceance Basin Assets.)
3. British energy supplier Centrica plc recently announced that it is about to divest its Canadian oil and gas exploration and production joint venture – CQ Energy Canada Partnership – to a consortium that includes, among others, Hong Kong-listed energy company MIE Holdings Corporation. Centrica, which currently carries a Zacks Rank #2 (Buy), owns 60% operating interests in the properties that mostly produce natural gas. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The deal, which requires shareholder and regulatory approvals, is expected to be completed in the second half of 2017 and is likely to generate £240 million ($305 million) in net proceeds for Centrica.
Centrica is the joint owner of the asset in the Western Canadian Sedimentary Basin along with Qatar Petroleum. The region has five main operating hubs, namely Foothills, Hanlan-Robb, North, Peace River Arch, and South. Total production from the asset is approximately 60,000 barrels of oil equivalent per day.
The cash-only transaction is in line with Centrica’s strategy to concentrate on its European assets, especially in the UK, Netherlands and Norway, as announced in Jul 2015. In the previous month, the company concluded the sale of its Trinidad and Tobago gas assets to Royal Dutch Shell plc. (Read more Centrica to Divest Canada-Based E&P Assets for $305M.)
4. Italy-based energy major Eni SpA E announced that it will commence commercial oil and gas production at its Sankofa field off the coast of Ghana in July, three months prior to schedule.
The Sankofa field is expected to yield 45,000 barrels per day. This is phase one of the $7.9 billion Offshore Cape Three Points (OCTP) project that will produce about 180 million standard cubic feet of gas on a daily basis from the Gye Nyame reserve by the end of 2018. OCTP is expected to more than double the domestic gas supply and accelerate economic growth in a country that also produces gold and cocoa.
Eni has a stake of 44.44% in OCTP, signifying the largest foreign direct investment in Ghana's history. Other stake holders include upstream trader Vitol which currently holds an interest of 35.56% while state oil company, Ghana National Petroleum Corp., has a combined, carried and participating interest of 20%. The project is expected to boost Ghana's oil output to about 200,000 barrels per day and gas yield to over 300 million standard cubic feet. (Read more: Eni to Begin Oil Production from Sankofa Ahead of Schedule.)
5. Brazil oil giant Petrobras PBR recently repealed a contract to supply natural gas to Ambar Energia – a unit of industrial conglomerate J&F Investimentos SA due to the breach of anti-corruption terms.
The contract relating to Ambar’s thermal power station, UTE Mário Covas, was entered into in mid-April. It contained a clause stating that Ambar had not paid or offered any bribes to officials to any seek undue advantage. However, Petrobras came to know of the recordings from the plea bargain agreements by J&F group executives, reflecting the breach of anti-corruption terms by the J&F group.
During contract negotiations, the price conditions Petrobras had agreed upon with Ambar were based on market criteria. However, as part of a plea bargain, J&F owners Joesley and Wesley Batista admitted that Ambar was able to secure artificially low prices for the natural gas Petrobras imported from Bolivia.
Joesley Batista gave prosecutors a recording of a conversation with Brazilian President Michel Temer in which Joesley asked for help in an antitrust dispute between Ambar and Petrobras over the terms of the supply contract. Petrobras intends to seek claims of around R$ 70 million or $21.9 million from Ambar due to the alleged breach of contract.
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 – rose by 1.11%. The best performer was downstream operator Tesoro Corp. whose stock price jumped 10.22%.
But longer-term, over the last 6 months, the sector tracker is down 13.08%. Offshore drilling powerhouse Transocean Ltd. RIG was the major laggard during this period, experiencing a 42.02% 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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