It was a week where oil futures settled lower and natural gas prices fell to their lowest level since May 2016.
On the news front, oilfield service major Schlumberger SLB reported upbeat fourth-quarter earnings on strength in its international operations. Meanwhile, Italian energy behemoth Eni S.p.A. E announced the flow of first oil from the Agogo field, offshore Angola.
Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures suffered a loss of 0.9% to close at $58.54 per barrel, while natural gas prices slumped 9% for the week to finish at 2.003 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Apache's Oil Find, BP's Asset Sale & More)
The crude benchmark fell for the second week in a row after the U.S. government reported large increases in gasoline and distillate stockpiles. Prices were also pressured by data showing drillers in the United States adding oil rigs, thus pointing to signs of rising domestic supplies. Weak economic growth numbers from China brought further downside.
Meanwhile, the negative price movement was more pronounced for natural gas even as the U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in supplies. The bullish sentiment was overwhelmed by mild winter weather forecasts amid strong production, which led prices to trickle down to their lowest level in more than three and a half years.
Recap of the Week’s Most Important Stories
1. Schlumberger’s fourth-quarter 2019 earnings of 39 cents per share (excluding charges and credits) surpass the Zacks Consensus Estimate of 37 cents. The bottom line also increased from 36 cents a year ago. The increase in Surface Systems, Drilling Systems, OneSubsea revenues in the international markets along with strong SIS digital software sales backed the company’s strong quarterly results.
As of Dec 31, 2019, the company had approximately $2,167 million in cash and short-term investments plus $14,770 million in long-term debt. This represented a debt-to-capitalization ratio of 38.8%. Schlumberger projects 2020 capital expenditure at $1.7 billion, suggesting no change from 2018 spending.
The oilfield service firm added that North American land drilling will experience significant contraction in 2020. To tide over this headwind, Schlumberger will look to improve margins by concentrating on execution and management of the controllable factors (including workforce reduction, asset sales, etc.). Meanwhile, the company is witnessing broad-based, strong growth in its international business. (Read more Schlumberger Q4 Earnings & Revenues Beat Estimates)
2. Eni recently started production from the Agogo oilfield, located offshore Angola. Notably, the production commencement in the 15/06 block occurred only nine months following its discovery. It was supported by operational synergies from the Floating Production Storage Offloading (FPSO) vessel Ngoma, located just 15 kilometres away from the oilfield.
The Agogo-1 well was drilled at a water depth of approximately 1700 meters and currently produces 10,000 barrels of oil per day. The output is expected to double in the next few weeks. The oilfield is anticipated to have 650 million barrels of oil. Encouragingly, new delineation wells will be drilled to uphold the field’s further potential. The company’s initiatives to start production in just nine months, with the help of existing infrastructures that maximize project value, are commendable.
The company, along with joint venture partners, Sonangol and SSI Fifteen, had launched a new exploration program in the block in second-half 2018. The exploration campaign led to five new discoveries that are expected to hold 2 billion barrels of oil.
These developments strengthened Eni’s footprint in the region and boosted organic growth. The company is the operator in the block with a 36.8421% stake. Its equity production from Angola currently stands at around 145,000 barrels of oil equivalent per day. (Read more Eni Begins Production From Agogo Oilfield Offshore Angola)
3. The U.S. Treasury Department permitted Chevron CVX to continue with its operations in Venezuela for three more months until April 22 despite U.S. sanctions on the country in crisis. This is the fourth waiver from the Trump administration since sanctions were announced in Nov 2018.
Even though Chevron has a long-standing presence in Venezuela, the Zacks Rank #2 (Buy) company incurred a loss of $104 million from its Venezuela operations during the first three quarters of 2019 and is feared to lose $2.7 billion worth of assets if required to leave the country. If the sanctions were not extended, Chevron’s exit would follow close on the heels of various other U.S. entities that bade adieu to Venezuela.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While the Venezuelan business represents a very small portion of Chevron’s extensive global portfolio, its departure from the country would have surely dented earnings. On Chevron's exit from the country, the Venezuelan government certainly had to nationalize its oil assets and the company would have to suffer write-downs.
If the waivers lapsed and Chevron is forced to bow out, it may find it difficult to resume its relationship with the South American nation even if U.S.-Venezuela ties are on the mend despite the country’s crumbling energy infrastructure. (Read more Chevron's Venezuela Operations Get Another 90-Day Waiver)
4. EQT Corporation EQT recently provided a guidance update on fourth-quarter 2019 operations and 2020 capital expenditure.
EQT Corporation envisioned its non-cash impairment charges between $1.4 billion and $1.8 billion for the fourth quarter, primarily due to surplus production and softened natural gas prices inducing asset write-downs of some proved and unproved reserves. The company is America’s largest natural gas producer with attractive acreage in the core of the Appalachian Basin.
EQT Corporation estimates its fourth-quarter net sales volumes in the band of 370-375 billion cubic feet equivalent (Bcfe), indicating a movement toward the upper end of the earlier guided range of 355-375 Bcfe. The company is likely to have incurred capital expenses between $340 million and $360 million in the fourth quarter, lying within its previously provided estimate of $320-$370 million. (Read more EQT Awaits $1.4-$1.8B Write-Downs, Aims for 30% Deleverage)
5. Noble Energy announced that Leviathan natural gas field has started commercial operation as expected. Its four wells and both subsea flowlines are currently fully operational. Natural gas produced from this field is currently supplied to Israel, Jordan and Egypt. The combined gross natural gas sales from the Leviathan and Tamar fields have averaged 1.5 billion cubic feet equivalent per day (Bcfe/d) in January, with peak day sales reaching up to 1.7 Bcfe/d.
This Leviathan field is located 80 miles offshore Israel in 5,500 feet of water. It is estimated to have recoverable resources of 22 trillion cubic feet (Tcf) of natural gas from 35 Tcf of in-place resource. Noble Energy holds a 39.66% interest in the Leviathan project, and other interest owners include Delek Drilling LP with 45.34% stake and Ratio Oil Exploration LP with 15%.
Noble Energy expects combined regional sales for Tamar and Leviathan to range between 1.6 Bcfe/d and 1.8 Bcfe/d for 2020. Natural gas produced from this field will assist Israel’s gradual transition from polluting coal to natural gas as a fuel source and improve air quality in the region.(Read more Noble Energy's Leviathan Field Starts Commercial Operation)
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
The Energy Select Sector SPDR – a popular way to track energy companies – edged down 1.2% last week. The worst performer was downstream operator Valero Energy Corp. VLO whose stock slumped 5.9%.
Longer-term, over six months, the sector tracker is down 6.2%. Houston-based oil and gas producer Occidental Petroleum OXY was the major loser during this period, experiencing a 12.7% 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. The Baker Hughes data on rig count will also be on the energy traders' radar, plus the 2019 Q4 earnings, with a few S&P 500 members coming out with quarterly results.
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