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Oil & Gas Stock Roundup: Enbridge's Midstream Sale, Chevron's North Sea Plans & More

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It was a week where both oil and natural gas finished lower.

On the news front, Enbridge Inc. (ENB - Free Report) struck a pact to unload its Canadian natural gas gathering and processing businesses C$4.31 billion ($3.3 billion), while Chevron Corp. (CVX - Free Report) plans to put most of its oil and gas fields in the ageing North Sea for sale.

Overall, it wasn’t a good week for the sector. While West Texas Intermediate (WTI) crude futures edged down 0.5% to close at $73.80 per barrel, natural gas prices fell around 2.3% to $2.858 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP, Baker Hughes, EQT & More)

The U.S. crude benchmark slipped for the first time in three weeks following a shock build in domestic inventories and rise in the oil drilling rig count. President Donald Trump’s tweet demanding action by OPEC to calm rising oil prices also played spoilsport.

Meanwhile, natural gas prices moved southward last week following a larger-than-expected increase in supplies.

Recap of the Week’s Most Important Stories

1.    Enbridge Inc. is expected to raise C$4.31 billion ($3.3 billion) from the divestiture of its Canadian natural gas gathering and processing (G&P) business to Brookfield Infrastructure Partners L.P.

The assets include G&P units in the Montney, Peace River Arch, Horn River and Liard basins in British Columbia and Alberta. The G&P units have a total operating capacity of 3.3 billion cubic feet per day (Bcf/d) and 3,550 kilometer of natural gas gathering pipelines. It comprises 19 natural gas processing plants and liquids handling facilities.

The proceeds from this transaction will help Enbridge pare its C$61.2 billion debt load that it assumed following last year’s Spectra Energy buy. The latest deal takes the company’s divestments to C$7.5 billion for this year – significantly above the targeted C$3 billion.

2.    Chevron is set to put up many of its North Sea oil and gas assets for sale, in a bid to streamline portfolio. The assets it intends to offload include Britannia and its satellites, along with Alba, Alder, Captain, Elgin/Franklin and Erskine fields. The move is part of Zacks Rank #1 (Strong Buy) Chevron’s strategic review of global portfolio to determine the competitiveness of all its projects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The decision seems to be a prudent one as extracting oil from North Sea is not so economical because production costs are much higher than the returns. Even other biggies like Bp plc and Royal Dutch Shell plc have jettisoned their non-core assets in the region. Early last year, Shell offloaded a large chunk of its North Sea assets to smaller rival Chrysaor Holdings Ltd. for $3.8 billion. BP also divested 25% of stake in the Magnus Field to EnQuest PLC.

Notably, output from North Sea accounts for just about 3% of Chevron’s total production, providing around 50,000 barrels of oil and 155 million cubic feet of natural gas a day. Instead, the company wants to sharpen its focus on the lucrative shale exploration in Permian, along with some of its major projects in the Gulf of Mexico and Kazakhstan. (Read more Chevron to Put North Sea Assets on Sale, Optimize Portfolio)

3.    Core Laboratories N.V.’s (CLB - Free Report) shares declined more than 13.5% to eventually close at $112.66 on Jul 2, after the company downwardly revised its second-quarter 2018 outlook amid deferred international activities.

In its first-quarter report, the company forecast second-quarter earnings of around 64-68 cents per share. However, a delay in the recovery of international oilfield development activities has compelled the company to cut its guidance. Hence, it now expects total revenues in the band of $174-$175 million against the prior guided range of $177-$179 million. It now anticipates EPS within 57-58 cents.

Core Laboratories’ Reservoir Description unit will bear the brunt of reduced revenues as most (almost 85%) of the segment’s income is based on international activity levels. Delayed activities in the North Sea, Middle East and Asia-Pacific regions as well as the Gulf of Mexico will impact its revenues.

Higher ramp-up costs related to deployment of new laboratory technology and infrastructure are also expected to hurt the segment’s operating income. (Read more Core Labs Slashes Q2 Guidance, Shares Plunge 13.6%)

4.    National Oilwell Varco, Inc. (NOV - Free Report) recently inked a deal to form a joint venture (JV) with Saudi Aramco for manufacturing onshore rigs and equipment in Saudi Arabia. The latest development will brighten prospects of the energy services sector in Saudi Arabia and boost future growth potential of National Oilwell.

The JV, which will serve as a major hub for high-specification rigs with breakthrough technologies, aims to construct up to 10 onshore drilling rigs annually. It will also supply advanced drilling equipment, spare parts and packages for jack-up rigs, along with providing repair and maintenance services for the sophisticated drilling technologies.

Located at Ras Al Khair on the kingdom’s east coast, the facility will lead to the creation of around 1,000 jobs. While the project is likely to be completed in 2020, the first rig is expected to be delivered in 2021.

Houston-based National Oilwell will own 70% stake in the JV and Saudi Arabia’s state-owned oil/gas entity will hold the remaining 30%. The tie-up is also supported by Saudi Aramco’s partnership with Nabors Industries Limited, which has already agreed to purchase 50 onshore rigs over a period of 10 years. (Read National Oilwell Inks Onshore Drilling JV With Saudi Aramco)

5.    SeaDrill Limited recently announced that it has successfully completed restructuring and emerged from the Chapter 11 bankruptcy process which was launched last year. Effective Jul 3, the existing shares of SeaDrill will be exchanged for 0.0037345 shares of the newly restructured company, with the number of common outstanding shares falling from 504.4 million to 100 million.

The fiscal reset provides the company with $2.1 billion in cash, improving its liquidity position. Total backlog of the company currently stands at $2.3 billion.

Per the plan, the maturities of all secured credit facilities worth $5.7 billion have been deferred by five years, with no amortization payments till 2020, along with significant covenant relief. Under the plan, roughly $2.4 billion of bonds have been exchanged for equity. The scheme has also equitized more than $1 billion in contingent newbuild obligations. SeaDrill has raised $1.08 billion of fresh capital that would comprise $880 million secured loans and $200 million equity.

SeaDrill has been given the approval to list its new common shares on the New York Stock Exchange under the same ticker symbol ‘SDRL’. Trading in about 16 million new shares will commence on Jul 3, with additional new shares likely to begin trading in the subsequent weeks. The company intends to report first-half year and third-quarter results in November. (Read more SeaDrill Emerges From Bankruptcy, Shares Sink to 52-Week Low)

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

-0.5%

-3.7%

CVX

-1.8%

-2.1%

COP

0.0%

+20%

OXY

+0.7%

+14.8%

SLB

0.0%

-11.3%

RIG

-1.9%

+16.2%

VLO

-2.7%

+16.1%

MPC

0.0%

+3.3%

 

Reflecting the tepid 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 independent refiner Valero Energy Corp. (VLO - Free Report) whose stock fell 2.7%.

Longer-term, over six months, the sector tracker is up 2.2%. Large independent producer, ConocoPhillips (COP - Free Report) is far and away the major gainer during this period, experiencing a 20% 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 and monthly reports from the EIA, IEA and OPEC.

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