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Oil & Gas Stock Roundup: ExxonMobil, Chevron, Transocean & More

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It was a week where oil prices extended their recent declines but natural gas futures moved above the critical $3 threshold.

On the news front, Exxon Mobil Corporation (XOM - Free Report) announced plans to spend more than $2 billion to build a massive pipeline in the Permian Basin and smaller rival Chevron Corporation (CVX - Free Report) started production from the second LNG unit at the Wheatstone project in Australia. Meanwhile, Transocean Ltd. (RIG - Free Report) announced its intent to retire four rigs.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost about 1% to close at $65.06 per barrel, natural gas prices rose some 4.6% to $3.022 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Devon's Asset Sale, Exxon's Brazil Win & More)

The U.S. oil benchmark booked fourth weekly drop in a row on fears of supply increase, climb in domestic production, and increasing rig count.

Of late, oil futures have been dragged down by reports that top suppliers Saudi Arabia and Russia are likely to step up output amid reduced supply from Iran and Venezuela.

The commodity was also spooked by the federal government’s EIA report that showed production climbing to a fresh record.

Data showing U.S. drillers adding oil rigs for fourth consecutive week brought further downside.

Meanwhile, natural gas prices moved northward last week on warm weather forecasts that should lead to rising power sector demand.

Recap of the Week’s Most Important Stories

1.    ExxonMobilintends to construct a pipeline in the Permian Basin, in line with its plan to allocate more than $2 billion for midstream asset expansions in the crowded shale play.

The largest publicly traded integrated energy firm along with Plains All American Pipeline will likely invest billions of dollars for building a pipeline that will transport crude to the Gulf coast region from the Permian Basin.

The Permian faces a dearth of pipeline capacity for transporting oil to Gulf Coast export facilities, major refinery terminals and principal hubs like Cushing. This has forced Midland operators to sell stranded oil at a big discount to that in Cushing.

The latest announcement seems that ExxonMobil is following the same path to construct pipeline networks in the Permian so that explorers can boost oil production. In fact, the integrated energy firm is willing to lift Permian production three times through 2025. (Read more ExxonMobil to Construct Pipeline in Crowded Permian)

2.    Chevron recently achieved a major milestone, as it started production at its second unit of the Wheatstone LNG project in Western Australia, solidifying its position as one of the biggest suppliers of natural gas to the Asian countries.

The project is located 7.5 miles west of Onslow and is intended to process gas from the Wheatstone and Iago fields, both of which are operated by Chevron. The Zacks Rank #1 (Strong Buy) company holds an 80.2% interest in the offshore licenses containing the Wheatstone and Iago fields. The Wheatstone fields are estimated to contain more than 4.5 trillion cubic feet of gas deposits. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The $34-billion Wheatstone project consists of two liquefaction trains with a shipment capacity of 8.9 million metric tons of LNG per year. The first cargo from liquefaction train 1 was shipped last October, few months behind target. With the second train coming online, Chevron currently operates five LNG trains in Australia, including three at the Gorgon Project. (Read more Chevron's 2nd Train at Wheatstone LNG Project Comes Online)

3.    Transocean recently announced its intention to retire four of its aging rigs —Deepwater Discovery, Deepwater Frontier, Deepwater Millennium and Songa Trym — amid continued offshore weakness. Post the announcement of its decision, the company’s shares have declined more than 3% to eventually close at $11.92 on Jun 15. In regard to this, the oilfield services player will book non-cash impairment charges of around $520 million, which will be reflected in its second-quarter results.

Evidently, Transocean’s Deepwater Discovery built in 2000, has been stacked since March 2015. Likewise, Deepwater Frontier, established in 1999, is also stacked since November 2015. The company also stacked its Deepwater Millennium drillship — built in 1999 — since May 2016. The same is the case of Songa Trym — which had been added into Transocean’s portfolio as part of the acquisition of Norwegian contractor, Songa Offshore — that needs to get retired amid lack of contracts in the current scenario.

Transocean has been facing pressure in its top line owing to lower contract drilling revenues from the deepwater and ultra-deepwater floaters amid reduced dayrates and weak utilization. Last September, Transocean retired six of its ultra-deepwater floaters that had been cold-stacked, booking $1.4 billion charge to cover the cost of the same. The latest retirement of the four rigs was actually quite inevitable, considering the challenging issues associated with stacking as well as the present bleak deepwater drilling scenario. (Read more Transocean to Retire 4 Rigs, Take Related $520M Charge)

4.    Energy XXI Gulf Coast, Inc. recently inked a deal, per which privately held Dallas-based operator Cox Oil Offshore LLC will acquire the former. Apart from expanding Cox’s presence in the Gulf of Mexico (GoM), the acquisition also offers Energy XXI the much-needed respite and best solution to maximize its shareholders’ value amid its distressing financials.

Per the deal, Cox will buy all outstanding shares of Energy XXI for $9.10 a share, representing a 21% premium to Energy XXI’s closing share price as of Jun 15. The transaction is valued at $322 million.

Energy XXI has had been going through quite a tumultuous phase since a couple of years, considering its bankruptcy filing and then successfully emerging out of it, along with a major shakeup in its leadership position.

Interestingly, the latest development comes a month after the company announced its decision to offload non-core assets worth $125 million to Orinoco Natural Resources LLC, which would have ended up acquiring 35% stake in Energy XXI. Of course, negotiations with Orinoco Natural have been terminated now, due to the more profitable proposition by Cox. (Read more Energy XXI to be Acquired by Cox for $322M in GoM Push)

5.    Pioneer Natural Resources Company (PXD - Free Report) announced plans to sell its entire stake in Colorado’s Raton Basin.

The divestment to Evergreen Natural Resources LLC is expected to fetch $79 million. The transaction, which needs to meet customary closing conditions, will likely conclude in July 2018. Through the January-to-March quarter of 2018, the to-be-divested properties produced 84 million cubic feet of natural gas every day.

The sale is in line with Pioneer Natural’s focus to operate only in the Permian Basin. To become a pure play firm in the Permian, Pioneer Natural also divested certain Eagle Ford assets – spreading across 10,200 net acres. The company believes that operating on the low-cost and prospective drilling locations in the Permian Basin will help generate high cashflow for shareholders. (Read more Pioneer Natural to Dispose Entire Raton Stake: Here's Why)

Price Performance

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.

Company

Last Week

Last 6 Months

XOM

-3.5%

-2%

CVX

-1.9%

+5.1%

COP

-5.9%

+26.4%

OXY

-2.5%

+18.2%

SLB

-3.7%

+2.7%

RIG

-8%

+28.8%

VLO

-3.8%

+32.3%

MPC

-6.9%

+15.5%

Reflecting the negative oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -2.9% return last week. The worst performer was independent oil refiner and marketer Marathon Petroleum Corporation (MPC - Free Report) whose stock fell 6.9%.

But longer-term, over six months, the sector tracker is up 8%. Another downstream operator, Valero Energy Corporation (VLO - Free Report) is far and away the major gainer during this period, experiencing a 32.3% 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, all eyes are on the oil producers’ meeting set for Jun 22 in Vienna, which will decide what happens next regarding their supply curb policy.

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