It was a week where both oil and gas prices lost ground.
On the news front, sponsor TransCanada (TRP - Free Report) won approval to build its controversial Keystone XL Pipeline through the state of Nebraska, while BP Plc (BP - Free Report) became the first European oil major to resume share repurchase since the 2014 oil slump.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures edged down 0.3% to close at $56.55 per barrel, while natural gas prices slumped 3.6% to $3.097 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: TOT's Acquisition, ANDV & ECA's Q3 Numbers, & More)
The U.S. oil benchmark fell after the U.S. Energy Department's inventory release showed that crude stockpiles recorded an unexpected weekly build. The report further revealed that gasoline inventories increased slightly from previous week.
However, the talking point from the data sets was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. Specifically, U.S. output rose by 25,000 barrels per day last reported week to more than 9.6 million barrels per day – the most since the EIA started maintaining weekly data in 1983.
Meanwhile, natural gas futures logged a big decline despite a larger-than-expected decrease in supplies – the season’s first withdrawal. Unfavorable weather forecasts and strength in the commodity’s production fueled the downside.
Recap of the Week’s Most Important Stories
1. TransCanada Corporation’s Keystone XL Pipeline has finally received a regulatory approval from Nebraska commissioners after a prolonged period of delay. The decision marks a partial victory for TransCanada since the regulators have approved the project on an alternative route rather than the company’s proposed route.
The $8-billion Keystone XL pipeline with 830,000 barrels' capacity was designed to improve oil extraction from Alberta’s oil sands and the Bakken region in the U.S. refineries. The initial phase of the pipeline project was finished in 2011. A proposal was made to add another 1179 miles to the 2100-mile-long pipeline. The project, already approved by Canada, Montana and South Dakota, had been eagerly awaiting a federal ruling from the Nebraska state.
Nebraska commissioners’ recent verdict, granting approval to the project on an alternate route, created new problems. Per the company, the originally proposed route was most efficient. The alternate route will likely balloon costs and delay the disputed pipeline project further.
TransCanada announced that it is set to begin the review of Nebraska’s decision to examine the economics of the project. The company will thereby take an official call regarding construction and completion of the pipeline after carefully reevaluating the project’s viability and schedule. (Read more: Nebraska Okays TransCanada Keystone XL on Alternate Route)
2. BP Plc recently commenced a share buyback program, keeping with the plans announced along with the third-quarter 2017 earnings report. This makes BP the first leading energy player in Europe to recommence buybacks after 2014, when repurchases were stalled as crude price started falling on supply glut woes. As per the program, BP will repurchase no more than 1.96 billion shares between Nov 15 and the company’s annual general meeting in 2018.
The company’s strong financials, primarily supported by crude price recovery, are backing this decision. During the third quarter, BP reported adjusted earnings of 57 cents per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items. The bottom line not only surpassed the Zacks Consensus Estimate of 50 cents but was way higher than the year-ago 30 cents. Moreover, the improving financial position shows that the firm has come a long way since the 2010 oil spill incident in the Macondo Prospect.
Investors should know that with the buyback, BP will be able to overcome the dilution problem under its scrip dividend plan that entitles the investors’ options for choosing stocks as payout instead of cash. (Read more BP to Recommence Share Repurchase as Crude Bounces Back)
3. Oil refining and marketing giant Marathon Petroleum Corp. (MPC - Free Report) recently announced that it will sell its fuel distribution services and refining and logistics assets to its midstream subsidiary MPLX LP (MPLX - Free Report) for $8.1 billion. The deal is expected to be over by Feb 1, 2018.
Of the $8.1 billion, Marathon Petroleum will receive $4.1 billion in cash. The remaining $4 billion will be in the form of equity of MPLX, comprising 111.6 million common (Limited Partner) units of MPLX along with 2.3 million general partner units, including incentive distribution rights. This will enable Zacks Rank #2 (Buy) Marathon Petroleum to keep 2% general partner interest in its subsidiary. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While the deal is expected to enrich MPLX's earnings by diversifying it with fee-based stable revenue streams and strengthening the partnership’s distributable cash flow base, Marathon Petroleum is following its strategy of enhancing shareholder value by accelerating dropdowns to MPLX. The increased equity participation in the subsidiary will also help Marathon Petroleum to receive a steady and growing revenue stream. (Read Marathon Petroleum Opts for Strategic Dropdown, Gets $8.1B)
4. Oil and natural gas company, SandRidge Energy, Inc. (SD - Free Report) recently agreed to acquire its rival Bonanza Creek Energy Inc. (BCEI - Free Report) , a Denver-based company for a total consideration of $746 million including cash and stock.
The cash and stock deal will require SandRidge to buy all the outstanding shares of debt-free Bonanza at $36.00 per share. This marks a premium of 17.4% to Bonanza Creek’s Nov 14 closing price. For every share of Bonanza Creek, SandRidge will pay $19.20 in cash and $16.80 in its own shares. Per SandRidge, the deal is expected to be over by the first quarter of 2018.
The deal will enable SandRidge to increase its presence in Colorado's Denver-Julesburg Basin by attaching an enriched inventory of drill-ready locations, which will complement its current portfolio. The deal includes 67,000 net acres adjacent to SandRidge‘s Niobrara Shale acreage.
Cost and operational synergies from the deal will aid SandRidge, which recovered from bankruptcy at the end of 2016 while Bonanza Creek came out of bankruptcy in early 2017. The acquisition will help the combined entity to yield risk-adjusted returns in the coming years. (Read more SandRidge Announces Bonanza Creek Buyout Worth $746M)
5. Cheniere Energy, Inc. (LNG - Free Report) reported wider-than-expected third-quarter 2017 loss, which stemmed from increased costs.
Overall costs and expenses soared 145.8% to $1,106 million from the same quarter last year. The increase is mainly attributed to the higher cost of sales which jumped to $824 million compared with $253 million in the prior-year quarter. Operating and maintenance expenses rose to $114 million in the quarter, reflecting an increase of 87% from the prior-year figure.
Depreciation and amortization expenses also increased from $49 million a year ago to $92 million in the reported quarter. Higher SG&A costs and inclusion of impairment charges further led to increased costs in the quarter under review.
During the quarter, the company shipped 44 cargoes from Sabine Pass liquefied natural gas terminal in Louisiana. Total volumes lifted in the reported quarter were 160 trillion British thermal units.
Cheniere Energy updated its guidance for full-year 2017 despite the wider-than-expected loss. The raised guidance reflects the management’s confidence in its construction projects which are much ahead of the schedule.
The adjusted EBITDA is expected to be between $1.8 billion and $1.9 billion, 8.8% higher than the prior guidance. Distributable cash flow is likely to be between $600 million and $700 million compared with the prior guidance level of $500-$700 million. (Read more Cheniere Energy Q3 Earnings Lag, Sales Top Estimates)
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
Reflecting the week’s bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -3.7% return last week. The worst performer was offshore drilling rig operator Transocean Ltd. whose stock slumped 10.2%.
Longer-term, over 6 months, the sector tracker is down 1.2%. Oilfield services behemoth Schlumberger Ltd. was the major loser during this period, experiencing a 14% price depreciation.
What’s Next in the Energy World?
With the 2017 Q3 earnings season essentially over, market participants will get back to closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count.
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