It was a week where the price of oil rallied to a three-year high. However, natural gas futures were down sharply.
On the news front, energy explorer Hess Corporation (HES - Free Report) announced a major oil discovery offshore Guyana, while Brazil’s Petrobras (PBR - Free Report) agreed to shell out $2.95 billion to resolve a U.S. shareholder lawsuit over a graft scandal.
Overall, the sector started 2018 on a mixed note. While West Texas Intermediate (WTI) crude futures gained about 1.7% to close at $61.41 per barrel, natural gas prices fell 5.4% to $2.795 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Crude's Bullish Year End, SandRidge's Deal Cancellation & More)
Building on its second annual gain in a row, oil prices saw a solid start to the New Year. The first week of 2018 saw U.S. oil benchmark attain its highest closing since December 2014. The major catalyst was the Energy Department's inventory release, which revealed that crude stockpiles recorded another higher-than-expected weekly draw.
On a further bullish note, political turmoil in Iran has raised the specter of production disruption in OPEC’s third-biggest producer. Data showing the number of U.S. oil rigs falling for a second straight week helped cement those gains.
Oil stockpiles have shrunk in 31 of the last 39 weeks and are down almost 109 million barrels since April. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 424.5 million barrels, current crude supplies are 11.4% below the year-ago period and the lowest since 2014.
Meanwhile, natural gas – one of 2017’s worst-performing commodities – registered another drop following a below-average decrease in supplies. Forecasts of an end to the harsh cold snap and the resultant dip in heating demand added to the bearish sentiment, bringing prices down sharply.
Recap of the Week’s Most Important Stories
1. Hess announced that the sixth oil discovery — Ranger-1 exploration well — since 2015 in the Stabroek Block, offshore Guyana, was a success.
The five world class discoveries in the block — Liza, Payara, Snoek, Liza Deep and Turbot —are projected to have total recoverable resources of over 3.2 billion barrels of oil equivalent. Further, resources related with the Ranger-1 discovery will raise this estimate.
The drilling of the Ranger-1 well was started by partner ExxonMobil Corporation’s associate Esso Exploration and Production Guyana Ltd. on Nov 5, 2017. It hit about 230 feet (70 meters) of high-quality, oil-bearing carbonate reservoir. The well was drilled to a total depth of 21,161 feet (6,450 meters) in water depth of 8,973 feet (2,735 meters). ExxonMobil, the operator of Stabroek Block, holds 45%, while Hess and CNOOC Nexen Petroleum Guyana Limited hold 30% and 25%, respectively.
The discovery further validates the significant potential of Guyana. This is likely to attract other oil giants to boost financial returns and create significant value for shareholders. (Read more Hess Discovers Oil in Stabroek Block, Offshore Guyana)
2. Petrobras, which has been reeling under severe graft and corruption charges, recently agreed to pay $2.95 billion to settle class-action lawsuits filed by investors. The payout marks the biggest such payment in the United States by a foreign entity and one of the largest securities class action settlements in the U.S. history. The settlement seeks to put to rest one of Brazil's most notorious cases of fraud.
The Brazilian oil giant was at the heart of the massive corruption scandal -- dubbed "Operation Carwash" -- which incriminated other industries like banks, construction firms and shipyards along with high-level politicians. Various lawsuits were filed against Petrobras by shareholders to recoup losses triggered by money laundering and bribery schemes.
Many senior executives of the company were accused of taking bribes for inflated contract schemes. Former Brazilian President Luiz Inacio Lula da Silva was also charged with corruption and sentenced to an imprisonment term of nearly 10 years. Charges were also pressed against the current President Michael Temer in May 2017, shaking the nation, following which the Brazilian Real fell hard against the dollar -- its worst since the global financial crisis in 2008.
Petrobras' involvement in the multibillion dollar corruption case was a major overhang for the company which scarred its credit metrics and turned it into the world's most indebted oil company. The settlement deal comes days after Brazil's securities regulator indicted eight more executives of Petrobras including the former CEOs, Maria das Gracas Foster and Jose Sergio Gabrielli. (Read more Petrobras to Pay $2.95B for Settling Investor Lawsuit)
3. In a bid to bolster its foothold in the Permian play, Andeavor (ANDV - Free Report) , recently acquired Rangeland Energy II, LLC. Financial details of the transaction have been kept under wraps. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure by March this year.
Per the deal, Andeavor will acquire Rangeland II’s assets in Midland and Delaware Basins, which include storage tanks and frac sand terminal along with 110-mile Rio Pipeline with throughput capacity of 145,000 barrels per day.
Post the acquisition, Andeavor intends to integrate the crude oil infrastructure with its Conan Crude Oil Gathering System, which is currently under construction. The $225 million Conan pipeline is around 130 miles long with a capacity to transport around 250,000 barrels of oil a day.
The integration of two pipeline systems will provide producers access to multiple markets and also support Andeavor's development of additional gathering systems in the area. It will also boost the commercial opportunities by providing direct access to the Midland Basin. Eventually, Andeavor intends to drop down the pipeline assets to its midstream spin-off Andeavor Logistics, LP. (Read more Andeavor Boosts Permian Foothold With Rangeland II Buyout)
4. Royal Dutch Shell plc (RDS.A - Free Report) has decided not to proceed with the $80 million deal to offload its refinery operations in Denmark. The Zacks Rank #1 (Strong Buy) company had signed the divestment deal with Dansk Olieselskab AS in September 2016, which included the sale of Shell's Fredericia refinery and local trading and supply activities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The deal was set for closure by the end of 2017, subject to satisfactory conditions. However, the deal was called off as Shell and Dansk Olieselskab could not reach a consensus regarding matters of sales within the stipulated time. As of now, Shell is not looking for other prospective buyers and intends to retain its refinery operations in Denmark.
The divestment was part of the company's move to lower its debt arising from the $50 billion mega acquisition of BG Group. It was part of its portfolio optimization strategy and the $30-billion global divestment program set for the 2016-2018 period. The move was also in line with the company's aim to upgrade and streamline its portfolio.
However, with Shell already closing more than $23 billion divestment deals, it remains on track to meet its target by 2018. Further, the company announced asset disposals worth around $2 billion and additional $5 billion divestment deals are already in advanced stages of talks for prospective transactions. (Read more: Shell Calls off Demark Refinery Unit Divestment Deal)
5. The board of directors of Cabot Oil & Gas Corp. (COG - Free Report) recently approved a 20% hike in its regular quarterly dividend. The company will now reward shareholders with a dividend of 6 cents per share compared with the previous payout of 5 cents. This translates to a dividend of 24 cents per share on an annualized basis.
The increased dividend will be paid to shareholders of record on Feb 7, 2018, as of Jan 24, 2018. The company's dividend hike for the second consecutive year reflects its commitment to create value for its shareholders and underlines its confidence in generating cash. We will like to remind investors that the company’s second-quarter 2017 dividend reflected a 150% quarterly increase.
Given a solid capital and liquidity position, the company is expected to continue enhancing shareholder value through efficient capital deployment activities.
Cabot has recently shifted its focus on strengthening its balance sheet. On Dec 20, 2017, the company announced its decision to divest Eagle Ford Shale holdings to a unit of Venado Oil & Gas LLC for $765 million. This will help the company to concentrate on high quality Marcellus Shale assets and achieve better returns. (Read more: Cabot Rewards Shareholders With 20% Dividend Hike)
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
In line with the week’s bullish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +3.5% return last week. The best performer was oilfield services major Schlumberger Ltd. (SLB - Free Report) whose stock jumped 9.1%.
Longer-term, over 6 months, the sector tracker is up 17.8%. Offshore drilling powerhouse Transocean Ltd. (RIG - Free Report) was the major gainer during this period, experiencing a 50.7% 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.
Zacks’ Best Private Investment Ideas
While we are happy to share many articles like this on the website, our best recommendations and most in-depth research are not available to the public.
Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors.
Click here for Zacks' private trades >>