It was a week where both oil and natural gas finished lower.
On the news front, supermajor Royal Dutch Shell plc (RDS.A - Free Report) and upstream player SM Energy Company (SM - Free Report) struck separate divestment deals, while energy infrastructure provider Kinder Morgan Inc. (KMI - Free Report) said that it is halting most activities and associated spending on the Trans Mountain pipeline expansion project.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures lost around 4.4% to close at $62.06 per barrel, while natural gas prices fell 1.2% to $2.701 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Concho Strengthens Permian Hold, Tallgrass to Buy MLP)
The U.S. oil benchmark closed in the red last week on escalating trade tensions with China and uptick in the rig count.
Announcements of duties and counter duties by Washington and Beijing on a wide range of imports have led to apprehensions of a full-blown trade battle between the world’s two biggest economies. Market participants fear that the dispute could potentially hamper global growth and harm oil demand.
A rise in the oil drilling rig count – pointing to a increase in domestic output – also played spoilsport. An early gauge of future activity, rigs drilling for oil in America totaled 808 in the week to Apr 6, as per the latest weekly report by Baker Hughes, a GE Company. That's much higher than the year-ago tally of 672, indicating a drilling resurgence – a big concern for oil investors.
Natural gas prices also moved southward last week despite a larger-than-expected decrease in supplies. The fall was triggered by a mild weather outlook (translating into tepid demand for the fuel) amid strong production. As it is, investors are expecting near-term consumption to dip following the end of the winter heating season.
Recap of the Week’s Most Important Stories
1. Royal Dutch Shell recently divested its entire stake in Oman’s Mukhaizna oilfield to India’s largest oil company, Indian Oil Corporation. The European oil giant sold its entire 17% interest in the oil field to IOCL Singapore PTE Ltd — a wholly-owned subsidiary of Indian Oil — for a total consideration of $329 million.
Mukhaizna oilfield, being the largest oilfield in Oman, accounts for 13% of the total oil production of 120,000 barrels per day in the nation. The deal marks the first upstream acquisition of Indian Oil in Oman that is likely to enhance its global footprint and growth opportunities in the Middle East region, along with bolstering India’s energy security.
The move will help Shell proceed with its $30 billion divestment program. The deal provides the company with a major uplift in its drive to decrease debt, following the acquisition of BG Group for $47 billion. The divestment is expected to reduce the company’s cost and enhance cash flow, as well as return to capital. The deal will also help the company to upgrade and streamline its upstream portfolio. (Read more Shell Sells Stakes in Mukhaizna Field to Indian Oil)
2. SM Energy Company has inked two definitive agreements for the sale of assets in the Williston Basin and Upton County. The company did not reveal the buyers. A cumulative amount of $292.3 million is expected from the transactions. The transactions are expected to close in the second quarter of 2018, with effective date of Jan 1, 2018.
The first agreement relates to the sale of remaining assets in the Williston Basin located in Divide County, ND. This comprises net acreage of about 119,400, which are primarily contiguous. It also includes net proved reserves as of year-end 2017 of 28.8 million barrels of oil equivalent (MMBoe), of which 52% are proved undeveloped. In December 2017, net production from the assets to be sold was about 6,100 Boe per day, of which 83% was oil.
The second transaction is for the sale of its third-party operated assets known as Halff East located in Upton County, TX. The assets likely to be sold in Upton County comprises a 60% working interest in third-party operated assets, a net acreage of about 5,400 and 1.6 MMBoe net proved reserves as of year-end 2017, of which 0% is proved undeveloped. In December, net production from these assets was about 1,025 Boe per day, of which 72% oil. (Read more SM Energy to Divest Assets in Williston Basin & Upton County)
3. Kinder Morgan states that it has deferred bulk of work on its C$7.4-billion ($5.8 billion) Trans Mountain pipeline expansion and is likely to abandon the project if Canada’s provincial and federal governments cannot reach an agreement by May 31.
Per Kinder Morgan Chairman Steve Kean, the plans to nearly triple the capacity of the Trans Mountain pipeline, which carries crude from Alberta's oil sands to a facility in the Pacific province of British Columbia, are likely to be scrapped if the ongoing legal disputes are not resolved by May 31. The Government of Canada approved the Trans Mountain expansion project on Nov 29, 2016. Since then, the Zacks Rank #3 (Hold) company is struggling with approval issues and oppositions from various groups. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The pipeline expansion has been facing antagonism from various provincial governments of British Columbia as well as municipalities, native groups and environmental activists. These emphasize the uncertainty over the key energy projects in Canada.
The shortage of pipelines and rail transportations has disrupted the production schedule of the companies in Western Canada. The companies had to slow their activities due to obstruction in crude transportation. In view of this, Alberta's provincial government supports the project that has also received approval from Canada's federal government. (Read more Kinder Morgan to Abandon Trans Mountain Expansion)
4. Private-equity firm Kimmeridge Energy Management Company has recently boosted its stake in Carrizo Oil & Gas, Inc. (CRZO - Free Report) to put pressure on the company, for pursuing asset sales and other strategic initiatives to buoy its staggering financials and share price. Activist Investor Kimmeridge increased its stake in Carrizo to 8.1%, reflecting a 65% jump from the previously held 4.9%. Post the development, shares of Carrizo have moved up 11.5%.
Carrizo is burdened with a heavy debt pile of around $1.63 billion, which is even higher than the company’s market capitalization. Notably, the company’s debt levels witnessed a year-over-year increase of 22.5% in 2017. Carrizo currently carries a debt-to-capitalization ratio of 81.5% that limits its growth and restricts financial flexibility. The low liquidity of the company, which stands at 0.33, also raises concern over its asset-management practices, considering it as a small-cap company.
Kimmeridge wants the company to divest its assets in the Eagle Ford Shale to delever its balance sheet. The private equity company either wants Carrizo to exit entirely from its Eagle Ford Holdings for debt reduction or if not all, then part of its holdings to use the proceeds for share buyback purposes. (Read more Activist Investor Plans Carrizo Shake-Up, Hikes Stake)
5. SeaDrill Limited’s shares increased 15.12% to eventually close at 23.6 cents on Apr 9, reflecting investors’ optimism after the company received virtually unanimous backing for its reorganization plan.
The company’s financial restructuring plan received approval from 99.8% of the creditors. Per the restructuring agreement, the international offshore drilling company will witness capital injection of $1.08 billion that would comprise $880 million of secured loans and $200 million equity.
SeaDrill’s restructuring plan will now have to be approved on a confirmation hearing scheduled to commence on Apr 17, 2018. Following the approval of the plan, existing shareholders will receive 1.9% stake in the post-restructuring equity.
Being one of the worst sufferers of the downturn and burdened with massive debt, the company had filed for Chapter 11 bankruptcy protection on Sep 12 to restructure its balance sheet amid volatile oil prices.
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
Despite the bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – remained essentially unchanged last week. The best performer was independent refiner Andeavor (ANDV - Free Report) whose stock jumped 6.3%, while offshore operator Transocean Ltd. lagged the pack, down on the week by about 1.8%.
Longer-term, over six months, the sector tracker is down 0.9%. Oil giant Exxon Mobil (XOM - Free Report) was the major decliner during this period, experiencing a 9% price depreciation.
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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