It was a week where both oil and gas prices lost ground.
On the news front, U.S. energy major Chevron Corp. (CVX - Free Report) set its investment budget for 2018 at $18.3 billion, down 4% from its projected spending this year. Meanwhile, Bill Barrett Corp. and Helmerich & Payne Inc. (HP - Free Report) struck separate acquisition deals.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures lost about 1.7% to close at $57.36 per barrel, while natural gas prices slumped 9.4% to $2.772 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Exxon's Restructuring, Shell's Cash Dividend Resumption & More)
Notwithstanding OPEC and other major producers’ agreement to expand their output-cut deal beyond March – for another nine months to the end of 2018 – the U.S. oil benchmark dropped to its lowest settlement since Nov 16.
The major culprit was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. In fact, U.S. output rose by 25,000 barrels per day last week to 9.7 million barrels per day – the most since the EIA started maintaining weekly data in 1983. A massive build in gasoline supplies also played spoilsport.
Meanwhile, natural gas futures sunk to their lowest finish since Oct 27 following a surprise increase in supplies and predictions of warmer-than-normal weather (translating into weak heating gas demand) over the next few days.
Recap of the Week’s Most Important Stories
1. Chevron Corporation offered a glimpse of its 2018 capital spending plans.
The company has set its capital and exploratory budget at $18.3 billion, down by 4% from its 2017 projected investment of less than $19 billion. Next year's budget is also around 18% lower than the company’s 2016 spending of $22.4 billion and down 46% from the 2015 expenditure of $34 billion.
Revised downward for the fifth consecutive year, the second-biggest U.S. oil and gas group's cut in capital spending reflects Chevron's plans to optimize its expenses, while relying increasingly on shale drilling.
Of the American multinational's total 2018 capital expenditure, a little over 86% is planned to be incurred in its upstream operations. In particular, Chevron is concentrating on increasing its investment in shale as it strives to boost its U.S. shale production next year.
For 2018, the company intends to spend $4.3 billion in shale – up 70% year over year – the lion's share (or $3.3 billion) going to the lucrative Permian Basin of Texas and New Mexico alone. The remaining $1 billion has been set aside for other shale investments.
Overall, the oil giant plans to shell out $6.6 billion for its domestic upstream operations. An additional $9.2 billion will target international upstream projects. (Read more: Where Will Chevron Spend the Bulk of Its 2018 Capex?)
2. Shares of the upstream player Bill Barrett Corp. declined about 4% on Dec 5 after the company announced plans to acquire the private energy firm Fifth Creek Energy Company, LLC. Shares of Bill Barrett further plunged 18.71% to eventually close at $4.65 on Dec 6.
The Zacks Rank #2 (Buy) company’s plans to issue common stock to repay Fifth Creek’s debt did not find much favor among investors. However, despite the stock dilution, the combined entity is poised for long-term growth on increased scale and synergies. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The acquisition transaction is valued at $649 million based on the closing price of Bill Barrett’s shares on Dec 4. Subject to satisfactory conditions and shareholder’s approval, the transaction is set for closure by the first or second quarter of 2018.
Post the acquisition, the new combined entity will be listed on the exchange under the name “New BBG” with both Bill Barrett and Fifth Creek becoming its subsidiaries. Mr. Scott Woodall, President and CEO of Bill Barrett, will continue to serve at the same positions of the combined entity.
Fifth Creek will receive 100 million shares of the New BBG. Along with that, the transaction value also includes the assumption of $54 million of Fifth Creek’s debt by Bill Barrett. (Read more Bill Barrett Increases DJ Acreage With $649M Buyout Deal)
3. Helmerich & Payne Inc. recently acquired Colorado-based drilling tech firm Magnetic Variation Services, LLC (“MagVAR”). However, the terms of the deal have been kept under wraps. Contract drilling services provider Helmerich and Payne remains focused on increasing directional drilling. Earlier this year, the company had acquired Dallas-based drilling tech firm MOTIVE Drilling Technologies, Inc. for around $75 million.
Established in 2010, MagVAR provides technological assistance pertaining to directional drilling to energy explorers and drillers. The technology is utilized in both onshore and offshore fields in Asia, North America, South America, Europe and Africa.
With the help of comprehensive 3-D geomagnetic reference modeling, MagVAR aims at the identification and the elimination of the anomalies in real-time, thus improving the accuracy of directional drilling process. It will help to enhance well production and lower drilling costs.
The acquisition will improve the directional drilling process and will enable Helmerich & Payne to drill wells more efficiently and accurately leading to better quality wellbore. (Read more Helmerich & Payne Buys MagVAR to Enhance Drilling Technology)
4. In a bid to expand its Utica acreage, upstream player Eclipse Resources Corp. (ECR - Free Report) recently inked a deal with private operator Travis Peak Resources LLC to acquire the latter’s north-central Pennsylvania assets. Post the announcement, shares of the company rose more than 6% to eventually close at $2.28 on Dec 11.
Per the deal, Eclipse Resources will acquire 44,500 net acres in Tioga and Potter counties of Pennsylvania in an all-equity deal valued at $93.7 million, thus maintaining its leverage and liquidity metrics. Subject to satisfactory closing conditions, the transaction is set for closure by January 2018.
In a separate transaction, Eclipse Resources agreed to acquire Cardinal NE Holdings, LLC for 18.3 million in cash. The deal will entitle Eclipse Resources to gain midstream assets and related gathering infrastructure in the acquired acreage.
The Travis Peak acquisition will add around 87 net drilling locations and boost the company’s Utica dry gas acreage by approximately 85%. The acquisition includes one proved developed producing well with production capacity of 6.5 million cubic feet per day.
5. Enbridge Inc. (ENB - Free Report) and Phillips 66 (PSX - Free Report) plan to gauge shippers’ interest in transporting significant volumes of liquid, through Gray Oak Pipeline, to the Gulf Coast market from Permian Basin of West Texas. The to-be-built pipeline’s open season has been announced on Dec 11.
As per the firms’ estimates, the Gray Oak Pipeline will initially have a daily throughput capacity of 385,000 barrels. If shippers show significant interest, Phillips 66 and Enbridge will think of expanding capacity.
The Gray Oak Pipeline will likely commence operations by the second half of 2019. Investors should know that the pipeline system will open access to shippers and crude producers for transporting liquid to oil refining facilities and export terminals.
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
Shrugging off the week’s bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +0.3% return last week. The best performer was refiner Andeavor (ANDV - Free Report) whose stock jumped 5.3%.
Longer-term, over 6 months, the sector tracker is up 5.1%. Another downstream operator Valero Energy Corp. was the major gainer during this period, experiencing a 33.6% price appreciation.
What’s Next in the Energy World?
As usual, market participants will be 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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