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Oil & Gas Stock Roundup: Occidental's Q4, Shell's Acquisition & More

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It was a week wherein both oil and gas prices logged handsome gains.

On the news front, Occidental Petroleum (OXY - Free Report) reported fourth-quarter earnings that came above the Zacks Consensus Estimate, while Royal Dutch Shell plc (RDS.A - Free Report) agreed to acquire German battery maker sonnen.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures gained 5.4% to close at $55.59 per barrel, natural gas prices rose 1.6% to $2.625 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP and TOTAL Report Q4 Earnings)

The U.S. crude benchmark rose for the fifth time in seven weeks Continued optimism surrounding talks between the United States and China to resolve the trade war boosted prices, while the commodity also drew support from the OPEC-agreed cutbacks.

Meanwhile, natural gas prices registered an weekly uptick following an in-line decrease in supplies. Investors were also buoyed by forecasts of colder weather, which should lead to the heating fuel’s robust demand.

Recap of the Week’s Most Important Stories

1.    Houston-based energy explorer Occidental Petroleum reported fourth-quarter 2018 earnings of $1.22 per share, beating the Zacks Consensus Estimate of $1.12 by 9%. The company’s outperformance resulted from an increased production from Permian Resources.

Occidental Petroleum’s average daily net oil, liquids and gas production volume expanded to 700,000 barrels of oil equivalent per day (BOE/d) from 621,000 BOE/d in the prior-year quarter. This improvement in production volume was backed by higher drilling activity and solid output in the Permian Resources region. Permian Resources production improved 57% year over year.

Occidental Petroleum expects first-quarter production to be in the range of 706,000-713,000 BOE/d and Permian Resources production within 256,000-261,000 BOE/d. The company estimates 2019 production between 715,000 and 730,000 BOE/d. Occidental Petroleum envisions 2019 Permian Resources production in the range of 278,000-288,000 BOE/d. (Read more Occidental's Q4 Earnings & Revenues Surpass Estimates)

2.    Royal Dutch Shell recently agreed to acquire a Germany-based home energy storage company, sonnen, in order to ramp up sustainable energy business. The move is a significant step for the company, which is playing an important role in the transition toward low-carbon energy on a worldwide basis. The financial terms of the acquisition are yet to be disclosed.

sonnen makes residential battery systems, which are responsible for storing energy generated through solar panels. The company has its footprint in several countries in Europe like Germany, Italy, and the United Kingdom, as well as in Australia and the United States. The company has installed more than 40,000 battery packs all over the globe. In 2017, it generated around $73 million in revenues. Notably, sonnen entered the electric vehicle charging business in 2018. The latest deal is expected to be a significant one for Shell, which has boosted investments in renewable energy and power markets over the last few years.

This step puts it in direct competition with companies like Samsung, Tesla and others. Markedly, Shell invested around $70 million in sonnen last May. Following the completion of the deal — expected in first-quarter 2019, per Reuters — sonnen will become Shell’s wholly-owned subsidiary. (Read more Shell Buys sonnen to Boost Cleaner Energy Footprint)

3.    BP plc (BP - Free Report) announced the commencement of gas production from West Nile Delta project’s second stage. The British energy giant expects daily maximum production volumes of the commodity from this offshore project in Egypt to touch 700 (MMCF) million cubic feet of gas by April.

Investors should know that in the past three years, the Zacks Rank #3 (Hold) integrated energy player has successfully placed 21 key upstream projects online, including West Nile Delta’s second stage. BP has made a projection that all major upstream developments will help it produce daily volumes of 900,000 barrels of oil equivalent by 2021.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In Egypt, BP has invested more than $35 billion in the past 55 years. With this, BP has placed itself as among the largest overseas investors focused in developing the country’s prolific resources. Once all the five fields of the West Nile Delta project start production, the company expects the development to produce 1.4 billion cubic feet of natural gas daily — equivalent to as high as 20% of the recently-produced natural gas volumes by Egypt. (Read more BP Commences West Nile Delta Gas Development's Second Stage)

4.    McDermott International, Inc. (MDR - Free Report) plummeted 26.7% following the announcement of incurring a $168-million charge for cost overruns on the Cameron LNG project. The charge is expected to be reflected in the company’s fourth-quarter and full-year 2018 results, which is scheduled to be reported on Feb 25. The project under construction is expected to produce liquefied natural gas (or LNG) of almost 14 million tons per year, once completed.

Unfavorable labor productivity, as well as rising subcontracts, commissioning and construction management costs were the reasons behind the change in estimate. Notably, in second-quarter and third-quarter 2018, the company incurred additional costs of $165 million and $482 million, respectively, for the Cameron LNG project. Although the changes did not affect its net income during the quarters, delivering projects on budget still remains a target for the company. The latest overrun has further weakened investors’ confidence, as reflected in the recent price slump.

For the Cameron LNG project located in Hackberry, LA, McDermott entered into a joint venture (JV) with Chiyoda Corp. The JV was awarded the contract, valued at around $6 billion. McDermott’s scope of work on the project incorporates engineering, procurement and construction activities for the addition of liquefaction and export facilities. (Read more McDermott Plunges 26.7% on Cameron LNG Project Cost Surge)

5.    After coming up with profitable results in the third quarter, Transocean Limited (RIG - Free Report) disappointed investors by reporting a net loss in the fourth quarter of 2018. The company posted adjusted loss of 34 cents a share, wider than the Zacks Consensus Estimate and the year-ago figure, both of which stood at 24 cents.

Lower-than-anticipated revenues from harsh environment floaters along with increasing costs led to the underperformance. Precisely, revenues from harsh environment floaters came in at $253 million, lagging the consensus estimate of $298 million. Weather-related downtime on a couple of its harsh environment floaters located offshore Canada led to lost revenues of $21 million. Further, operational inefficiencies and reduced y/y dayrates led to weaker results than the year-ago quarter.

Transocean’s strong backlog, which was recorded at $12.2 billion as of Feb 11, reflects steady demand from customers. While the company won a few small contracts since the last fleet report in October 2018, the $830-million worth five-year drilling contract received from Chevron served as a fundamental component to boost its backlog that came in at $11.5 billion as of Oct 22. (Read more Transocean Swings to Loss in Q4, Tops Sales Estimates)

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

+5%

-1.4%

CVX

+2.5%

+1.4%

COP

+5.9%

-0.5%

OXY

+3.4%

-15%

SLB

+6.3%

-29.2%

RIG

+7.9%

-20.2%

VLO

+1.4%

-25.6%

MPC

+3.9%

-17.3%

In line with the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +5.1% return last week. The best performer was offshore driller Transocean whose stock surged 7.9%.  

Longer-term, over six months, the sector tracker is down 9.6%. Oilfield service biggie Schlumberger (SLB - Free Report) was the major loser during this period, experiencing a 29.2% price decline.

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 the 2018 Q4 earnings, with quite a few S&P 500 members coming out with quarterly results.

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