It was a week where the price of oil finished lower and natural gas futures also pulled back from their highest levels since May.
On the news front, oilfield service majors Schlumberger Ltd. (SLB - Free Report) and Halliburton Co. (HAL - Free Report) kicked off the fourth-quarter energy earnings season. Importantly, both companies, apart from coming out with estimate beating numbers, indicated that activity in North America remain strong even as the international market continues to improve. Meanwhile, British oil giant BP plc (BP - Free Report) saw its Deepwater Horizon costs spill over $65 billion following a new, $1.7 billion charge in the fourth-quarter.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures lost about 1.5% to close at $63.37 per barrel, while natural gas prices edged down 0.5% to $3.185 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell's Acquisition, Apache & Encana's Production Guidance & More)
The U.S. oil benchmark recorded its first weekly decline in a month. The major culprit was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. U.S. output rose by 258,000 barrels per day last week to 9.75 million barrels per day, tantalizingly close to December’s record of 9.789 million barrels per day -- the most since the EIA started maintaining weekly data in 1983. In fact, the Energy Department believes that U.S. output will break through the 10 million barrels per day barrier soon, thereby cancelling out cuts from OPEC and its allies.
The negative sentiment was partially offset by another higher-than-expected weekly draw. Oil stockpiles have shrunk in 33 of the last 41 weeks and are down more than 120 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 412.7 million barrels, current crude supplies are 15% below the year-ago period and the lowest since 2015.
Meanwhile, natural gas – one of 2017’s worst-performing commodities – settled lower following a smaller-than-expected decrease in supplies. The 183 billion cubic feet (Bcf) withdrawal was also below the five-year (2013-2017) average net shrinkage of 203 Bcf for the reported week, pointing to tepid demand for the heating fuel.
Recap of the Week’s Most Important Stories
1. The world’s largest oilfield services provider, Schlumberger, reported fourth-quarter 2017 earnings of 48 cents per share (excluding charges and credits), ahead of the Zacks Consensus Estimate of 44 cents and the year-ago figure of 27 cents.
Surge in SIS software sales, ramp up of drilling operations in Colombia and Argentina along with higher pricing in North America’s onshore market supported the strong fourth-quarter results.
On a further positive note, Schlumberger issued a positive outlook for 2018. The company, which plans to exit its marine and land seismic acquisition services, believes that the positive oil market sentiment will push up North American investment by upstream operators. Meanwhile, the international market is expected to witness 5% higher spending in 2018 following three years of decline.
As of Dec 31, 2017, the company had approximately $5,089 million in cash and short-term investments and $14,875 million in long-term debt. This represents a debt-to-capitalization ratio of 32.8%. In the October-to-December quarter, Schlumberger bought back 1.6 million shares. (Read more Schlumberger's Q4 Earnings Beat Estimates, Up Y/Y)
2. Smaller rival Halliburton reported better-than-expected fourth quarter profit thanks to improved utilization and pricing gains in North America -- the company’s largest market by sales. Halliburton’s income from continuing operation (adjusted for Venezuela write-downs and charges associated with U.S. tax reform) came in at 53 cents per share, above the Zacks Consensus Estimate of 46 cents – the fourteenth consecutive quarterly outperformance. Moreover, revenues of $5,940 million beat the Zacks Consensus Estimate of $5,567 million.
Along the results, Halliburton also sounded optimistic in its view that the North American land market is improving rapidly, driven by increased utilization and pricing, particularly for pressure pumping.
Additionally, the outlook for Halliburton’s international market continues to improve. In fact, regional sales were up 11% sequentially in the fourth-quarter on the back of strong activity gains across a number of product services lines in Latin America, as well as increases in drilling and stimulation activity in the Eastern Hemisphere.
Halliburton’s capital expenditure in the fourth quarter was $439 million. For the full year, capital spending was $1,373 million. As of Dec 31, 2017, the company had approximately $2,337 million in cash/cash equivalents and $10,430 million in long-term debt, representing a debt-to-capitalization ratio of 55.5%. (Read more Halliburton Shares Leap After Q4 Earnings, Sales Beat)
3. BP is likely to pay additional charge of about $1.7 billion in fourth-quarter 2017 relating to the 2010 Deepwater Horizon ("DWH") spill. The Court Supervised Settlement Program ("CSSP"), which was established post the DWH, has ordered BP to pay a post-tax non-operating charge of about $1.7 billion for the remaining Business Economic Loss ("BEL") and other claims related with the CSSP. The payment will be carried out over a multi-year period.
The high claims determined by the CSSP along with the effect of the Fifth Circuit’s adverse May 2017 ruling on the matching of revenues with expenses while appraising BEL claims has resulted in this charge.
The claims are about seven times higher than the company’s expectations. By the end of September 2017, BP paid about $63.4 billion to cover clean-up costs and legal fees connected to the largest environmental disaster in the U.S. history where 11 rig workers were killed. Moreover, hundreds of outstanding claims have yet to be closed. (Read more: BP to Cough Up Additional $1.7B in Charges for 2010 Oil Spill)
4. Pipeline operator, Energy Transfer Partners recently agreed to divest its compression units, CDM Resource Management and CDM Environmental & Technical Services LLC, to natural gas compression services provider, USA Compression Partners, LP for about $1.8 billion.
Per the deal, USA Compression will pay $1.225 billion in cash along with 19.2 million of its common units and 6.4 million of its Class B units to Energy Transfer Partners. However, there won’t be any quarterly distributions for the Class B units in the first year following the closure of the transaction, which is expected by the first half of 2018.
The deal is expected to strengthen Energy Transfer Partners' balance sheet by lowering its debt burden. As of Sep 30, 2017, the partnership had long-term debt (less current maturities) of $33,630 million. Debt-to-capitalization ratio was about 52.2%. Apart from reducing the debt load, the cash proceeds of $1.225 billion can also be used for funding new projects. The move also reduces the chance of the partnership slashing its distribution – currently yielding an attractive 11.3% – in the coming quarters. (Read more Energy Transfer Partners Divests Compression Units for $1.8B)
5. Moving forward with its $30-billion divestment goal, Royal Dutch Shell plc (RDS.A - Free Report) is set to offload West Qurna 1 oil field in Iraq to Japan's Itochu Corporation. However, the value of the transaction has been kept under wraps.
The Zacks Rank #1 (Strong Buy) company also intends to close the divestment of its interest in the Majnoon oil field in Iraq to the state-run Basra Oil Company by June 2018. Production in the Majnoon oil field started in 2014, with average capacity of 210,000 barrels per day. It is to be noted, Shell has a 45% operating stake in the Majnoon oil field. Malaysian national petroleum company, Petronas and Iraq’s Missan Oil Company have 30% and 25% stakes in the field, respectively.
The primary reason behind Shell leaving Majnoon is that the oil department of the country and the company could not agree on the future production plans and investments for the field. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The divestment is in line with Shell's strategy to steer clear of debt stemming from its $50-billion acquisition of BG Group. The move will also help the company to upgrade and streamline its portfolio. (Read more Shell to Vend West Qurna 1, Majnoon Oil Field Stakes)
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 bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -0.4% return last week. The worst performer was Offshore drilling powerhouse Transocean Ltd. (RIG - Free Report) whose stock slumped 4.3%.
Longer-term, over 6 months, the sector tracker is up 19.8%. Independent refiner Valero Energy Corp. (VLO - Free Report) was the major gainer during this period, experiencing a 46% 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.
However, the 2017 Q4 earnings again remain the primary focus this week, with a number of S&P 500 members coming out with quarterly results.
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