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Oil & Gas Stock Roundup: Chevron's $50B Anadarko Buy, Shell's Asset Sale & More

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It was a week where oil prices settled at their highest since October, while natural gas futures remained steady.

On the news front, oil major Chevron Corporation (CVX - Free Report) agreed to buy Texas-based upstream company, Anadarko Petroleum Corporation (APC - Free Report) for roughly$50 billion. Meanwhile, another supermajor Royal Dutch Shell plc (RDS.A - Free Report) agreed to sell 22.45% interest in Caesar Tonga oil field in the Gulf of Mexico for $965 million.  

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures rose 1.3% to close at $63.89 per barrel, natural gas prices held almost unchanged for the week to finish at $2.66 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Concho Midstream Monetization, Noble Energy Project Approval)

The U.S. crude benchmark rallied to a fresh five-month high, underpinned mainly by production cuts from the OPEC-led group of exporters, and drop in supply from Venezuela and Iran. The so-called OPEC+ deal (an alliance of OPEC, Russia and other non-member countries) is withholding output by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran also continue to tighten the commodity’s fundamentals.

Further to this, signs of stable demand (contrary to previous expectations of slowing consumption) and escalating geopolitical risk in Libya – a major supplier of oil to Europe – boosted bullish sentiment in the energy market.

Meanwhile, natural gas prices were little changed after the weekly inventory release showed a smaller-than-expected increase in supplies. However, the injection was higher than the five-year average.  

Recap of the Week’s Most Important Stories

1.    America’s No. 2 energy producer, Chevron, placed a huge bet on the future of shale oil and liquefied natural gas ('LNG') today by striking a roughly $50 billion deal to buy a Texas-based upstream company, Anadarko Petroleum. The acquisition will give it access to potentially lucrative Permian Basin acreage, LNG operations in Mozambique, as well as attractive deepwater areas in the Gulf of Mexico (GoM). The agreement is subject to Anadarko stockholder approval and regulatory clearance and is expected to close in the second half of 2019.

Under the terms of the agreement, Anadarko shareholders will receive $16.25 in cash and 0.3869 shares of Chevron for each Anadarko share they own. This combination of cash and stock values Anadarko shares at $65 apiece, a 37% premium to the pre-announcement closing price. The cash component of the deal is worth about $8 billion, while the equity contribution will be obtained through the issuance of approximately 200 million in Chevron shares. The headline price of $50 billion includes the assumption of $15 billion of Anadarko’s debt.

Apart from greater economies of scale, there are expected to be approximately $2 billion in annual synergies as a result of this deal. Taking advantage of the significant value unlocked by the Anadarko buyout, Chevron intends to increase its annual share buyback program to $5 billion from $4 billion. Importantly, the acquisition is expected to catapult Chevron to the big league – consisting of ExxonMobil and Royal Dutch Shell – as far as cash flow is concerned. (Read more Chevron Set to Snap Up Anadarko in $50 Billion Deal)

2.    Royal Dutch Shell recently agreed to divest its 22.45% non-operated stake in the Gulf of Mexico’s (GoM) Caesar Tonga field to a subsidiary of Delek Group Ltd., an Israeli conglomerate. The Zacks Rank #3 (Hold) Anglo-Dutch energy major will receive $965-million cash in return. The deal calls for Delek to sign a sales and purchase agreement spanning 30 years with Shell’s trading arm in the United States for the oil produced in the field.

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

The transaction has an effective date of Jan 1, 2019 and is expected to be over by the end of the third quarter. Delek intends to finance the transaction with non-recourse loans from international banks and own funds. The field is located 300 kilometers south of Louisiana, at a water depth of 1,500 meters. Currently, gross average output from the field is 70,000 barrels of oil equivalent per day (BOEPD) (comprising 90% oil).

The deal is in line with Shell’s ongoing $10-billion divestment program, which is treading on the heels of the $30-billion divestment program in the 2016-2018-time frame. The proceeds from the Caesar Tonga divestment is expected to be directed toward more long-term value-generating assets. In a similar manner, the energy giant divested its Danish upstream unit for $1.9 billion in 2018. (Read more Shell to Divest Non-Op Stake in a GoM Field for $965M)

3.    National Oilwell Varco, Inc.’s (NOV - Free Report) shares dipped more than 8% to close at $26.87 on Apr 12, after the company’s Chairman Clay Williams stated that the energy equipment supplier’s first-quarter 2019 results are likely to be impacted by certain headwinds. The firm expects revenues to come in below prior expectation of $2.08-$2.1 billion. National Oilwell now anticipates first-quarter 2019 sales to come in at $1.94 billion, reflecting a sequential fall of 26%. Further, it expects to post a GAAP operating loss of around $48 million. Adjusted EBITDA is likely to total $140 million, down from $160 million and $279 million recorded in first-quarter 2018 and the last reported quarter, respectively.

Notably, during NOV’s fourth-quarter call, management had already notified investors that the oil crash during the final months of 2018 would likely take a toll on the firm’s near-term results. In fact, the company did predict a sequential fall in revenues from all the three segments—Rig Technologies, Wellbore Technologies and Completion & Production—in first-quarter 2019. However, the impact of weak oil prices has been much greater than expected.

Contraction of orders, fewer deliveries of drill pipes and other equipment, and slowdown of activities in both the offshore and North American markets will impact the company’s first-quarter results. As such, the firm will likely come up with lower-than-expected results from each of its three segments amid tough operating environment. (Read more National Oilwell Shares Decline 8% on Drab Q1 Outlook)

4.    Williams Companies (WMB - Free Report) recently announced the divestment of a 50% stake in Jackalope Gas Gathering Services in the Powder River Basin region to Crestwood Equity Partners LP (CEQP - Free Report) for 485 million. Crestwood, which already owned 50% interest in Jackalope system, now attains full control over the assets for a reasonable price. Notably, prior to the deal, Williams was the operator of Jackalope assets, while Crestwood was responsible for commercial services.

Williams had been contemplating to offload Jackalope assets since last November and has finally sold the business to its joint-venture partner. The company plans to use the proceeds from the deal to trim its heavy debt load, which was $22 billion at the end of 2018, representing a debt-to-capital ratio of 60.5%.

Further, by jettisoning these assets, the company will save around $90 million that it has planned to invest in this business. As Jackalope was not a significant asset in Williams’ portfolio, the divestment of these assets will not just help in strengthening its balance sheet, but also aid in portfolio optimization and investment in high-return expansion projects.

The deal follows another smart move by the company last month to form a joint venture with the Canada Pension Plan Investment Board (CPPIB) in a bid to optimize midstream operations in Marcellus and Utica regions. Williams will also utilize the cash proceeds from CPPIB for debt reduction. (Read more Is Williams' Jackalope Deal With Crestwood a Win-Win?)

5.    Petrobras’ (PBR - Free Report) shares declined 9.29% on Friday, marking the biggest drop in 10 months, closing the session at a four-month low of $14.94. The decline came after Brazilian President Jair Bolsonaro interfered with Petrobras’ diesel pricing policy.

The state-owned company announced its decision to raise diesel prices by 5.7% on Apr 11, only to back off a day later on the behest of Bolsonaro. The Brazilian government halted the diesel price hike out of concern for truckers, who had spurred a nation-wide strike in Brazil last year to protest against rising fuel prices.

The latest move has frightened investors that the government may continue to deflect from its commitment to free markets and intervene in the company’s affairs. The government’s hasty decision to suspend the fuel price rise has sent shockwaves in Brazilian markets, reviving fears of government meddling, as was the case with the past administration, thereby hurting the nation’s economy and the company’s prospects. (Read more Petrobras' Shares Dip 9% on Fears of Interventionism)

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

-1.9%

-0.7%

CVX

-5.3%

+2.2%

COP

+1.9%

-10.1%

OXY

-4%

-13.3%

SLB

+1.4%

-22.5%

RIG

-3.5%

-33.2%

VLO

+2%

-17.2%

MPC

-3%

-24.4%

 

The Energy Select Sector SPDR – a popular way to track energy companies – remained essentially flat last week. But longer-term, over six months, the sector tracker is down 8%. Offshore driller Transocean Ltd. was the major loser during this period, experiencing a 33.2% 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.

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