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Oil & Gas Stock Roundup: Callon Petroleum's Acquisition, McDermott's Contract Wins & More

Nilanjan Choudhury

It was a week where both oil and natural gas prices settled higher.

On the news front, shale producer Callon Petroleum Company CPE agreed to buy Houston-based upstream player Carrizo Oil & Gas CRZO in a $3.2 billion deal, while McDermott International MDR clinched twin contracts from Saudi Aramco.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures rose 4.7% to close at $60.21 per barrel, while natural gas prices moved up 1.4% for the week to finish at $2.453 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: ExxonMobil's Q2 Update, TC Energy's Asset Sale & More)

The U.S. crude benchmark hit the highest settlement level since May 22, buoyed by a significantly bigger-than-expected drop in U.S. crude supplies and worries about Tropical Storm Barry that sharply curtailed offshore oil production in the Gulf of Mexico (GoM).

Natural gas prices gained too as the market participants shrugged off another larger-than-expected climb in U.S. supplies and chose to focus on a bullish near-term weather forecast that could trigger strong power sector demand for the fuel, with an added push in the wake of the GoM storm.

Recap of the Week’s Most Important Stories

1.  Callon Petroleum recently announced that the company has struck an all-stock deal to acquire Carrizo Oil & Gas.

The deal is valued at around $3.2 billion, which incorporates about $1.7 billion debt of Carrizo. The acquisition is expected to boost Callon’s footprint in the prolific Permian Basin. However, the company is set to lose its pure-play Permian status on acquiring Carrizo’s Eagle Ford shale play properties.

The combined company is expected to have around 200,000 net acres in the Permian Basin and Eagle Ford shale. Combined production in first-quarter 2019 was 102.3 thousand barrels of oil equivalent per day (Mboe/d), of which 71% was crude oil.

The deal is expected to generate more than $100 million of fee cash flow and annual cost-saving synergies in the range of $100-$125 million. (Read more https://www.zacks.com/stock/news/442963/callon-to-acquire-carrizo-for-32b-boost-permian-footprint)

2.   McDermott Internationals shares spiked 12.89% after the company announced that it clinched two major contracts associated with Saudi Aramco’s Marjan Increment Development project offshore Saudi Arabia. The twin contracts for Marjan Package 1 and 4 are worth more than $4.5 billion.

Under the Package 1 contract, which is worth more than $3 billion, McDermott will offer engineering, procurement, construction and installation (EPCI) of Marjan offshore field’s Gas-Oil Separation Plant (GOSP). China Offshore Oil Engineering Company will partner with McDermott for the Package 1 contract. The consortium contract led by McDermott aims at building the GOSP, which will enhance oil output from the Arabian Gulf field from 500,000 to 800,000 barrels per day.

Under the Package 4 contract, which is worth more than $1.5 billion, McDermott will provide EPCI of offshore gas facilities and pipelines. The contract involves the fabrication of three tie-in platforms and seven wellhead platforms, along with the installation of subsea trunk lines, in-field pipelines and subsea cables.

The engineering phase of this contract will commence during third-quarter 2019 and be completed by year-end 2022. The value of the contract will be reflected in McDermott’s second-quarter 2019 backlog.(Read more McDermott Wins EPCI Contracts Worth $4.5B From Saudi Aramco)

3.   Occidental Petroleum OXY) recently announced that the board of directors has approved a 1.3% increase in the quarterly dividend rate. The revised dividend will be 79 cents, payable Oct 15, 2019 to its shareholders of record at the close of business on Sep 10. The new annualized dividend rate of the company is $3.16 per share, resulting in a dividend yield of 6.26%. Its current dividend yield is better than the Zacks S&P 500 composite’s 1.88%.

Occidental's continued focus on the Permian Resources has been beneficial for the company.  Production from this region is expected to improve further from the current levels, thanks to the newly added wells. Occidental, which carries Zacks Rank #3 (Hold), has also executed a strategic initiative to divest of lower-margin, lower-return oil and gas production, with the plan to replace it with higher-margin and higher-return production. We expect these initiatives to help Occidental generate more free cash flow.

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

Occidental has a long history of sharing profits with its shareholders. The company has been distributing dividend since 1975. Occidental has increased its annual dividend for 17 consecutive years. The total increase in annual dividend of the company from 2002 exceeds 500%.(Read more Occidental Petroleum Board Approves 1.3% Dividend Hike)

4.   Chevron CVX and Phillips 66’s PSX joint venture, Chevron Phillips Chemical recently inked a deal with Qatar Petroleum to develop $8-billion petrochemical plant in the Gulf Coast region of the United States. The announcement of the deal comes on the heels of another pact signed between the companies just a few weeks ago to build the biggest petrochemical facility in Qatar for producing ethylene.

The latest facility, called the U.S. Gulf Coast II Petrochemical Project (UGSC II), would comprise an ethane cracker, which will process ethane — a byproduct of oil and gas drilling — into 2 million metric tons of ethylene, the building block of plastics, per year. The project will also include two high-density polyethylene units, each having the capacity to process ethylene into 1 million tons of polyethylene, which is the world’s most common plastic.

Final investment decision on the project will be made by 2021, with targeted startup of the facility in 2024.The facility is likely to process output from the Permian Basin’s booming hydrocarbon wells. Notably, with Permian producers boosting oil production, the output of gas and liquid by-products is on the rise, in turn providing cheap chemical feedstocks. (Read more Chevron-Philips JV, Qatar Unite for $8B Petrochemical Plant)

5.   Chevron’s operations in Venezuela are at the crossroads. The firm, which is the last U.S. oil major that is still operating in Venezuela, might be forced to exit the country if the Trump administration does not renew the company’s license to operate in the South-American nation. If the sanction waivers are not extended, Chevron’s exit would follow on the heels of various other U.S. companies that have bided adieu to Venezuela.

While the Venezuelan business represents a very small portion of Chevron’s extensive global portfolio, its exit from the country would surely dent earnings. On Chevron's exit from the country, the Venezuelan government will certainly nationalize its oil assets and the firm would have to take write-downs. If the sanction waivers are lapsed and Chevron is forced to exit, the firm may find it difficult to resume its relationship with the South American nation, even if U.S.-Venezuela ties improve, amid the collapsing energy infrastructure of Venezuela.

The US supermajor wants the White House to extend the waiver, which is set to expire on Jul 27. Chevron would have to suspend the JV with PDSVA, if the waivers lapse. Further, the Venezuelan government is most likely to seize the assets if the U.S. Treasury does not extend the waiver and sanctions remain in place.(Read more Chevron's Venezuela Business at Risk: Will US Extend Waivers?)

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

+2%

+7.6%

CVX

+2%

+12.9%

COP

+3.1%

-7.6%

OXY

+5%

-20.7%

SLB

+3.1%

-1.9%

RIG

+4.9%

-25.1%

VLO

+3.6%

+6.7%

MPC

+1.1%

-14.8%

Reflecting the positive market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – was up 2.1% last week. The best performer was Houston-based energy explorer Occidental Petroleum whose stock jumped 5%.

But longer-term, over six months, the sector tracker is up 3%. Integrated energy major Chevron was the major gainer during this period, experiencing a 12.9% price increase.

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. Meanwhile, the 2019 Q2 reporting season gets under way later this week

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McDermott International, Inc. (MDR) : Free Stock Analysis Report
 
Phillips 66 (PSX) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
Carrizo Oil & Gas, Inc. (CRZO) : Free Stock Analysis Report
 
Callon Petroleum Company (CPE) : Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
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