Oil & Gas Stock Roundup: Crude Below $100; CAM, FTI Sink on Weak Q3
Broader Market:
At long last, some sanity seems to be returning to the energy markets after speculators drove up prices to over $110 per barrel taking advantage of geopolitical concerns in the resource-rich Middle East.
Crude prices finished down for the third consecutive week amid concerns that the global growth is still in low gear, translating into reduced oil demand through 2014. Investors are also apprehensive that this month’s 16-day U.S. government shutdown has eroded demand in the worlds biggest oil consumer.
Sentiments were further dampened by a bearish Energy Information Administration (EIA) report that showed a big jump in inventories.
As per the EIA’s weekly ‘Petroleum Status Report,’ crude inventories climbed by 5.25 million barrels for the week ending Oct 18, 2013 to 379.78 million barrels. A spike in domestic production – now at their highest level since 1989 – and drop in refinery utilization rates led to the massive stockpile build-up with the U.S. even as imports fell. What’s more, storage at the Cushing terminal in Oklahoma, the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange, was also up 358,000 barrels.
Weighed down by these factors, by close of trade on Friday, West Texas Intermediate (WTI) oil was firmly in the red and settled at $97.85 per barrel, losing 2.9% for the week.
On the other hand, the broad-based S&P 500 index gained 0.9% and finished the week by hitting a new record high of 1,759.77. A bunch of encouraging earnings from major companies, positive economic data from China, together with the growing likelihood of a Fed Taper delay as a result of the shutdown and a tepid jobs report, pushed stocks higher.
The Sub-Sectors:
Integrated: Almost all major integrated players traded in the black, with the top gainer being Anglo-Dutch supermajor Royal Dutch Shell plc (RDS.A), which was up 2.8% over the week after it joined forces with four other oil behemoths – Brazil’s Petrobras, France-based TOTAL SA, Chinese offshore giant CNOOC Ltd. and state-owned China National Petroleum Co. – to win a 35-year production sharing contract for the giant Libra field, offshore Brazil.
San Ramon, CA-headquartered energy behemoth Chevron Corp. (CVX) was also in the news last week, as the company’s Australian subsidiary acquired 100% exploration rights in two new offshore oil blocks in the country’s deepwater Bight Basin.
But overall, most of the ‘Big Oil’ is suffering from marginal or falling returns irrespective of the crude price movement, reflecting their struggle to replace reserve base and maintain production growth, as access to new energy resources becomes more difficult.
E&P: While all crude-focused stocks stand to lose from falling commodity prices, companies in the exploration and production (E&P) sector are the worst placed, as they are able to extract less value for their products. Last week, the SIG Oil Exploration & Production Index traded down 1.5%.
Top decliners include Ultra Petroleum Corp. (UPL), whose shares shed 5.5%. Much of this seems to be tied to the natural gas producer’s $650 million acquisition of oil-producing properties in Utah’s Uinta Basin. While Ultra Petroleum saw the transaction as an effort to reduce its dependency on natural gas, investors gave thumbs down to the deal based on its not-so-inexpensive economics and the absence of decent infrastructure in the area.
On the other end of the spectrum, two of the best performers last week were domestic explorers QEP Resources Inc. and Noble Energy Inc. (NBL), shooting ahead of their peers with additions of 6.2% and 5.4% to their respective stock prices. While QEP Resources moved higher after activist hedge fund Jana Partners LLC unveiled a 7.5% stake in the oil producer, Noble Energy’s upward march was due to robust third quarter results. The earnings growth stemmed from increased production activities in the domestic plays as well as higher sales from Noble Energy’s Tamar natural gas field and Alen condensate field in offshore Israel and Equatorial New Guinea, respectively.
The other E&P stock making noise was Devon Energy Corp., rising 2.1%. Shares of the Oklahoma City, OK-based energy explorer upped after it announced plans to combine most of its U.S. midstream operations with Crosstex Energy to form a publicly traded master limited partnership. Devon, which will hold a controlling interest in the new entity, will also be its largest customer.
Oilfield Services: The oil services group – represented by the Philadelphia Oil Services Sector Index – was down 1.8% through the week, as subsea equipment makers Cameron International Corp. (CAM) and FMC Technologies Inc. (FTI) released disappointing earnings reports. Both the companies were hit hard, off 18.2% and 13.8%, respectively, for the week. Not only are both Cameron and FMC Technologies struggling with execution problems in the face of explosive demand, indications are that investors should be bracing themselves for more bad news in the upcoming quarters.
On the other hand, shares of National Oilwell Varco Inc. (NOV) rallied 4.5% on Friday after reporting better-than-expected earnings, in the process hitting a new 52-week high of $82.75. The oil and gas industry supplier’s results were buoyed by top line growth in all three of its segments amid a record high backlog.
Another top weekly gainer was offshore driller Transocean Ltd., which celebrated its reinstatement into the S&P 500 index after a five-year absence. The Switzerland-based firm’s stock jumped 7.9% on hope that the S&P 500 index funds will immediately be forced to buy the rig owner.
Refining & Marketing: This has been one sector that has underperformed the rest of the energy industry for the bulk of this year. With refiners being buyers of oil – whose price saw a steep climb recently – their profitability have been squeezed due to a rise in the input cost and lower crack spreads. With the earnings season kicking off next week, these headwinds are expected to translate into weak Q3 results for the sector components.
However, over the past fortnight or so, spreads have showed signs of strengthening yet again, pointing to the likelihood that the difficult operating environment could be over sooner than what many investors think.
Almost all major downstream stocks moved down last week despite any company-specific reasons to justify the pullbacks.
Natural Gas:
Investors continue to focus on temperature patterns to understand the fuel’s economic dynamics. As it is, natural gas fundamentals look uninspiring with supplies remaining ample in the face of underwhelming demand.
The EIA's weekly inventory release showed that natural gas stockpiles held in underground storage in the lower 48 states rose by 87 billion cubic feet (Bcf) for the week ended Oct 18, above the guided range (of 78–82 Bcf gain). The increase – the twenty-eighth injection of 2013 – also exceeded both last year’s build of 64 Bcf and the 5-year (2008–2012) average addition of 67 Bcf for the reported week.
While bullish speculators are betting on the upcoming winter heating season (Nov through Mar) to spur the commodity’s demand for heating, mild weather forecasts – for most of next month – have proved to be the dampener. As a result, natural gas spot prices ended Friday at $3.71 per million Btu (MMBtu), essentially unchanged over the week.
Performance Chart:
Ticker | Last Week’s Performance | 6 month performance |
XOM | +0.48% | -0.27% |
CVX | +0.79% | -0.60% |
RDS.A | +2.82% | +2.00% |
NBL | +5.44% | +35.37% |
UPL | -5.45% | -7.40% |
CAM | -18.22% | -13.46% |
RIG | +7.87% | -3.47% |
TSO | -4.42% | -12.81% |
This Week’s Outlook:
Apart from the usual suspects – the U.S. government data on oil and natural gas – market participants await another busy line-up of Q3 releases. In particular, the world’s top five non-state oil companies – TOTAL, BP, Exxon Mobil, Shell and Chevron – are all expected to come out with earnings reports.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Read the Full Research Report on CVX
Read the Full Research Report on FTI
Read the Full Research Report on RDS.A
Read the Full Research Report on NOV
Read the Full Research Report on NBL
Read the Full Research Report on CAM
Read the Full Research Report on UPL
Zacks Investment Research
