It was a week where oil prices tallied a loss but natural gas ended sharply higher.
On the news front, midstream player Andeavor Logistics L.P. ANDX and drilling contractor Nabors Industries Ltd. NBR announced big takeover deals, while supermajor BP plc BP started gas production from its Juniper project off the south-east coast of Trinidad.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures pulled back 1.5% to close at $48.82 per barrel, natural gas prices soared 7.5% to $2.983 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Pioneer & Apache's Q2 Numbers, Genesis Energy's Alkali Buy & More.)
Despite a favorable inventory data, oil prices recorded another weekly decline. The U.S. Energy Department's inventory release showed that crude stockpiles recorded a sharp decline for the sixth week in a row on record high refinery runs. With oil supplies continuing to fall, investor sentiment has turned slightly positive on dissipating fears about a meltdown to sub-$40 levels. Analysts also believe that the trend, if sustained, could help tighten the market significantly.
However, this positive effect was more than offset by a strong dollar and escalating tensions between the US and North Korea that sparked investor movement away from riskier assets to safe havens like gold. The commodity was also affected by lingering concerns over OPEC and its allies' success in rebalancing the market after the cartel’s July output rose to a new 2017 high.
Meanwhile, natural gas spiked to a 3-week high amid a smaller-than-expected increase in the cooling fuel’s supplies. Moreover, the demand situation looks promising with hot conditions set to prevail in most U.S. pockets in the later part of August and power generators burning more gas to meet intensifying cooling demand.
Recap of the Week’s Most Important Stories
1. Pipeline operator, Andeavor Logistics L.P. announced that it will acquire rival Western Refining Logistics L.P. WNRL, including the latter’s $310 million net debt, to extend its hold in the prolific Permian Basin, TX.
Per the $1.5 billion unit-for-unit deal, Andeavor Logistics, formerly known as Tesoro Logistics, will give 0.5233 units for each Western Refining Logistics unit to the latter’s unitholders. It means Andeavor Logistics will pay $25.28 for every Western Refining Logistics unit, which represents a premium of 6.4% to its closing price as of Aug 11, 2017. Andeavor Logistics expects the deal, which awaits regulatory approval from the unitholders of Western Refining Logistics, to be over in the fourth quarter of 2017.
The deal will provide Andeavor Logistics the opportunity to increase its asset base by adding more crude oil pipelines and gathering systems in the Permian Basin in West Texas and Southern New Mexico. It will also lead to lower marginal cost of capital, strengthening the partnership’s credit profile. It will receive almost 1134 kilometers of pipelines along with active storage capacity of 12.4 million barrels.
Andeavor Logistics will also benefit from Western Refining Logistics' distribution of wholesale petroleum products and crude oil and asphalt trucking businesses. (Read more Andeavor Logistics to Acquire Pipeline Operator for $1.5B.)
2. Drilling contractor Nabors Industries Ltd. announced plans to acquire Houston-based drilling player Tesco Corp. TESO to consolidate the oilfield services industry further.
The acquisition will be an all-stock transaction worth $215 million, wherein Nabors will purchase all the issued and outstanding shares of Tesco in exchange for 0.68 common shares of the former. The deal values Tesco’s stock at $4.62 reflecting a premium of about 19% on the Tesco’s closing price of $3.90 on Aug 11.
The deal is a win-win transaction for the both the companies which is likely to result into various financial, commercial and operating synergies. Nabors, which has a stretched balance sheet with a debt-to-capital ratio of over 55%, will be able to deleverage itself to certain extent by the issuance of shares for the acquisition of Tesco, which is free of debt as of Jun 30.
Nabors Drilling Solutions unit will be benefited by Tesco’s tubular running services which are expected to provide Nabors with comprehensive solutions and integrated offerings. This in turn is likely to drive the revenues of the company and position it for increased benefits amid the rising oil production of late.
Further, Nabors intends to synthesize its rig equipment subsidiary Canrig Drilling Technology Ltd. with Tesco’s equipment unit which is well noted for its product offerings and aftermarket service. This bodes well for the directional and horizontal drilling process of the company. (Read more: Nabors Acquires Tesco for $215M in an All-Stock Deal.)
3. British energy major BP plc’s unit, BP Trinidad and Tobago (“BPTT”), has announced the commissioning of the Juniper development which yielded its first gas. Juniper started production on schedule and under budget.
Juniper development represents the fifth of BP’s seven upstream major project start-ups and second in Trinidad planned for 2017. The project is anticipated to enhance BPTT’s gas production capacity by an estimated 590 million standard cubic feet a day.
Juniper signifies BP’s first subsea field development in Trinidad, which involves an investment of about $2 billion. It yields gas from the Corallita and Lantana fields through the new Juniper platform, which is located 80 kilometers (50 miles) off the south-east coast of Trinidad in water depth of about 110 meters. Subsequently, the gas flows to the Mahogany B hub through a new ten-kilometer flowline that was established in 2016.
The Trinidad Onshore Compression project in Trinidad was brought online in April. In June, BPTT announced that it has approved development of the Angelin gas field, which is anticipated to begin production in late 2019. Two other gas discoveries were announced by BPTT, which are expected to support future developments offshore Trinidad. (Read more: BP's Unit Brings Juniper Online on Schedule and Under Budget.)
4. U.S. gas exporter Cheniere Energy Inc. LNG reported mixed second-quarter results, wherein the Zacks Rank #3 (Hold) company incurred wider-than-expected loss, while revenues topped the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
During the quarter, Cheniere Energy shipped 48 cargoes from Sabine Pass liquefied natural gas terminal in Louisiana. Total volumes lifted in the reported quarter were 170 trillion British thermal units.
Cheniere Energy updated its guidance for full-year 2017 despite the wider-than-expected loss this quarter. The raised guidance reflects the management’s confidence in its construction projects which are much ahead of the schedule. The adjusted EBITDA is expected to be between $1.6 and $1.8 billion, 5.8% higher than the prior guidance.
The company is nearing the completion of its fourth liquefaction unit at its Sabine Pass export terminal in Louisiana. Train 4 initiated LNG production in late July and is expected to produce its first commissioning cargo shortly.
Altogether, Cheniere Energy intends to construct up to six trains at Sabine Pass with each train expected to have a capacity of about 4.5 million tons per annum. Train 3 came online in the first quarter. Train 5 is under construction and expected to get completed by 2019 while Train 6 is being commercialized and has the necessary approvals in place. (Read more: Cheniere Energy Incurs Wider-Than-Expected Loss in Q2.)
5. Brazil's state-run energy giant Petrobras PBR announced second-quarter earnings per ADR of 8 cents, lagging the Zacks Consensus Estimate of 15 cents. A significantly larger tax outgo on account of an adjustment program and lower oil sales volume in Brazil were primarily responsible for the underperformance, partly offset by higher crude price and cost cuts.
Importantly, Petrobras generated free cash flows of $2,907 million for the quarter ended Jun 30 – positive for the ninth quarter in a row – reflecting operational improvement and lower investments. Moreover, adjusted EBITDA edged up 2% year-over-year to $5,934 million.
During the six months ended Jun 30, 2017, Petrobras’ capital investments and expenditures totaled $7,230 million, 7% lower than the $7,814 million incurred in the year-ago period. Also, over the past year, the company cut its workforce by 18% through a voluntary separation program.
This allowed the world's most indebted oil company to trim its massive debt load. At the end of the Jun 2017, the company had net debt of $89,263 million, decreasing from the $96,381 million as of Dec 31, 2016. Net debt-to-capitalization ratio during the first half was approximately 53%, down from 55% six months ago. Additionally, Petrobras finished the first semester with cash and cash equivalents of $23,569 million. (Read more: Petrobras Q2 Earnings Miss but Manages to Cut Debt.)
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
Over the course of last week, the Energy Select Sector SPDR – a popular way to track energy companies – fell by -1.80%. The worst performer was offshore drilling powerhouse Transocean Ltd. whose stock price was down -5.00%.
Longer-term, over the last 6 months, the sector tracker is down -13.44%. It was again Transocean, which was the major laggard during this period, experiencing a 40.84% price decline.
What’s Next in the Energy World?
With the 2017 Q2 earnings season over, market participants will get back to closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas and the Baker Hughes data on rig count.
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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Tesco Corporation (TESO) : Free Stock Analysis Report
Nabors Industries Ltd. (NBR) : Free Stock Analysis Report
Western Refining Logistics, LP (WNRL) : Free Stock Analysis Report
Cheniere Energy, Inc. (LNG) : Free Stock Analysis Report
Tesoro Logistics LP (ANDX) : Free Stock Analysis Report
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