It was a week where both oil and natural gas finished lower.
On the news front, offshore driller Transocean Ltd. (RIG - Free Report) agreed to acquire smaller peer Ocean Rig UDW, Inc. for $2.7 billion, while supermajor Chevron Corp. (CVX - Free Report) scored a big legal victory over pollution claims in Ecuador that protects the company from having to pay $9.5 billion fine.
Overall, it was a dismal week for the sector. While West Texas Intermediate (WTI) crude futures fell 2.9% to close at $67.75 per barrel, natural gas prices dropped 4.8% to 2.776 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: ExxonMobil's Oil Find, Canadian Natural's Acquisition & More)
The U.S. crude benchmark slipped for the first time in three weeks after the Energy Department's inventory release showed surprise build in fuel (gasoline and distillate) stockpiles on weaker demand. On a further bearish note, domestic oil production continued to be at record levels. Growing concerns about demand growth amid escalating trade conflict between the world’s biggest oil consumers -- the United States and China -- also pressured the commodity futures.
Natural gas prices moved southward too, pressured by bearish weather predictions and strength in the commodity’s production. Investors were spooked by forecasts of moderating temperature in the next few weeks that could lead to decrease in the fuel’s demand. Unabated production from the Marcellus and Utica shale regions played further spoilsport.
Recap of the Week’s Most Important Stories
1. Banking on the crude rally, if there is one industry that is ready for more consolidations, it is the offshore drilling space. In this regard, the offshore drilling giant Transocean recently inked a deal to acquire smaller rival Ocean Rig UDW in a $2.7-billion deal.
The deal has been unanimously approved by the board of directors of both the companies. Subject to satisfactory closing conditions, along with its shareholders’ consent and other regulatory approvals, the deal is set for closure by the first quarter of 2019. Post the culmination of the deal, Transocean will own 79% stake in the combined entity and Ocean Rig will hold the remaining 21%.
The deal falls exactly in line with Transocean’s strategy. The company has been streamlining its portfolio by exclusively focusing on deep-water floaters and tapping into lucrative growth opportunities. Ocean Rig’s complementary assets and strong fleet quality will strengthen Transocean’s portfolio.
Specifically, the deal will add nine ultra-deepwater rigs, two harsh environment submersibles along with two additional ships under construction to Transocean’s portfolio. (Read more Transocean Ups its Offshore Game, to Buy Ocean Rig for $2.7B)
2. Chevronis breathing a sigh of relief, as an international tribunal ruled in favor of the integrated oil giant regarding a pollution-related case in Ecuador. The international arbitrator court in The Hague echoed the verdict of U.S. Supreme Court in 2017, which immunized Chevron from the payment of a landmark $9.5-billion fine in relation to the Ecuador pollution case.
Residents of Ecuador alleged that Texaco, a subsidiary of Chevron, let out wastewater into open pits across vast swaths of Lago Agrio region. A case pertaining to the same was filed in the United States. However, the same was dismissed, and Ecuadorian plaintiffs along with the American lawyer Steven Donziger had to refile the case in 2011 in Ecuador, wherein Chevron was ordered to cough up $9.5 billion as a penalty.
With the recent verdict, Chevron now stands to receive millions of dollars as economic compensation. The amount that Ecuador is required to pay to Chevron is likely to be settled in another 3 months. (Read more Chevron Emerges Victorious in Ecuador Pollution Case)
3. Shares of Halliburton Company (HAL - Free Report) dipped around 6% to close at $37.13 on Sep 5, after the company’s CEO Jeff Miller stated that the oil services giant’s third-quarter earnings are likely to be impacted owing to certain headwinds. Miller believes that the fall in activity levels in the Permian play amid pipeline woes will dampen the prospects of the company in the third quarter. Additionally, sluggishness in the Middle East contracts, stringent labor market and high inflation costs will add to the woes.
Notably, during Halliburton’s second-quarter call, management had already warned investors that a slowdown in production growth in the Permian Basin due to infrastructural bottlenecks will weigh on the company’s earnings for the remainder of 2018.
The latest guidance reflects a decline of 29% than what was expected about two months back. The Zacks Rank #3 (Hold) company’s third-quarter earnings are projected to fall by 8-10 cents per share. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Interestingly, the recent bleak outlook comes just a day after the biggest oilfield services company Schlumberger Limited warned its shareholders that the lack of takeaway capacity might reduce Permian production, hampering the business of the firm. However, given Schlumberger’s greater reliance on lucrative international market, its near-term prospects do not appear as dull as Halliburton, which derives most of its revenues from North American operations. (Read more Halliburton's Shares Decline 6% on Drab Q3 Outlook)
4. To reposition portfolio, Southwestern Energy Company (SWN - Free Report) has inked a definitive agreement for the divestment of Fayetteville Shale E&P and related midstream gathering assets with Flywheel Energy, LLC — a private company backed by Kayne Private Energy Income Funds.
The company will raise cash proceeds of $1.865 billion from this sale. Moreover, through the transaction, Southwestern Energy will also offload future contractual liabilities of about $438 million. The directors of Southwestern Energy unanimously approved the transaction, which will have an effective date of Jul 1, 2018 and is anticipated to close in December 2018.
The Fayetteville assets include about 915,000 net acres, 4,033 operated producing wells, 3.7 Tcf of proved reserves as of year-end 2017, estimated 2019 production of 225-230 Bcf and related midstream gathering infrastructure and compression.
The transaction is in line with the company’s strategy to streamline operation and focus on Southwest Appalachia’s high margin, liquids-rich assets. It will also improve the balance sheet. (Read more Southwestern Energy to Divest Fayetteville Assets for $1.865B)
5. Pipeline constraints in the prolific Permian play have opened a window of opportunity for the midstream companies to build new projects or expand the existing ones. In this regard, major pipeline operators Energy Transfer Partners LP (ETP - Free Report) and Magellan Midstream Partners, LP (MMP - Free Report) have teamed up with Delek U.S. Holdings, Inc. and midstream arm of Marathon Petroleum Corporation, MPLX LP to construct a new multi-billion-dollar pipeline project.
The 600-mile long pipeline will aid in oil transportation from the Permian basin to the Gulf Coast region. The carrier will transport oil to both Energy Transfer’s Nederland terminal and Magellan’s East Houston terminal, for final delivery to refining and export hubs in Houston, Corpus Christi and Beaumont.
The pipeline is likely to have an initial takeaway capacity of 600,000 barrels a day (bpd), expandable to a million bpd. The pipeline, which has already secured enough shipping commitments, will conduct an open season for obtaining additional shipper commitments in the next few days. Subject to regulatory and board approvals, the project is estimated to come online by mid-2020. (Read more Energy Transfer & Others Unite for Permian Pipeline Project)
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
Reflecting the week’s negative oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -2.2% return last week. The worst performer was offshore drilling powerhouse Transocean whose stock slumped 10.4%.
But longer-term, over six months, the sector tracker is up 7.4%. Large independent producer ConocoPhillips (COP - Free Report) is far and away the major gainer during this period, experiencing a 32.5% 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 OPEC and the IEA.
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