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Oil & Gas Stock Roundup: Chevron's $5B Noble Buy, Halliburton's Q2 & More

Nilanjan Choudhury
·8 min read

It was a week where oil remained essentially flat but natural gas prices settled lower.

On the news front, oil major Chevron CVX agreed to buy Texas-based upstream company, Noble Energy NBL for roughly $5 billion in stock. Meanwhile, oilfield service biggie Halliburton HAL reported second-quarter earnings.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures were roughly unchanged at $40.59 per barrel, natural gas prices lost 4.8% for the week to finish at 1.718 per million Btu (MMBtu). In particular, the oil markets ended virtually flat again after hitting a speed bump in the previous week.

Coming back to the week ended Jul 17, the crude benchmark was little changed with large but opposing forces at work. The commodity got a leg up after a report from the EIA showed a stockpile draw thrice above expectations. The decline in oil inventories was the largest so far this year, and came in tandem with a fall in gasoline and distillate supplies.

At the same time, investors remain worried by the second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions about another set of containment measures – already in place in certain regions - which might force many businesses to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s demand recovery.

Meanwhile, natural gas prices fell despite a lower-than-expected increase in supplies due to strong cooling demand. However, the fuel was pressured by an ongoing supply glut made worse by the coronavirus-induced drop off in usage.

Recap of the Week’s Most Important Stories

1.  Chevron has reached an agreement to acquire Noble Energy in an all-stock deal worth $5 billion. The U.S. supermajor agreed to pay $10.38 per share of Noble, was accounting for a 7.6% premium to the latter's last closing price prior to the deal's announcement. The takeover, which is one of the largest energy deal wins since the beginning of the pandemic, will also include Noble Energy's hefty debt load and hence will be valued at approximately $13 billion.

The buyout of Zacks Rank #2 (Buy) Noble Energy’s assets is anticipated to expand Chevron’s presence in the DJ Basin of Colorado and the Permian Basin across West Texas and New Mexico. Particularly, Noble Energy has a total of 92,000 acres in the United States’ number one basin, Permian. The acquisition will also generate potential annual cost savings of $300 million within a year of the deal's closing.

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

Further, this transaction will expand Chevron’s international footprint. The company will have access to Noble Energy’s low-cost, proven reserves along with cash-generating offshore assets in Israel, especially the flagship Leviathan natural gas project, thereby boosting its base in the Mediterranean. (Chevron Inks $5B Acquisition Deal With Noble Energy)

2.   Halliburton delivered better-than-expected second-quarter 2020 earnings as both the company’s segments - Completion and Production, and Drilling and Evaluation - outperformed the Zacks Consensus Estimate. The company reported earnings of 5 cents per share, compared to the Zacks Consensus Estimate of a loss of 11 cents. However, the bottom line tumbled 85.7% from the year-ago figure of 35 cents per share due to lower revenue contribution from North America activities.

Operating income from the Completion and Production segment came in at $159 million, significantly dropping 66.2% from the year-ago level of $470 million but beating the Zacks Consensus Estimate of $23.77 million. Meanwhile, Drilling and Evaluation unit profit declined from $145 million in the second quarter of 2019 to $127 million in the corresponding period of 2020. But the segmental income outperformed the Zacks Consensus Estimate of $94 million.

Even as the company relentlessly battles against a challenging business landscape in North America, it is looking to boost free cash flow generation and improve returns. This Houston, TX-based industry player maintains an efficient North America service delivery improvement strategy, a prudent capital management policy and a responsible and competent team. The steady deployment of cutting-edge digital technologies will enhance Halliburton’s efficiency and aid its cost-saving efforts to bode well both for the company as well as its customers. (Halliburton Q2 Earnings Top Estimates, Sales Miss Mark)

3.   BP plc BP recently announced an accord to acquire the remaining 50% ownership stake in the Fowler Ridge 1 wind asset in Indiana. Notably, the wind farm with 162 turbines, having capacity to produce 300 megawatt (MW) of energy, has been acquired from Dominion Energy (D). However, the financial aspects of the deal have been kept under wraps. The transaction is expected, subject to regulatory clearance, to conclude by 2020-end.

The British integrated energy player also has operating ownership in Fowler Ridge 2 and 3 wind farms. Notably, the latest agreement, once completed, is likely to boost the net wind energy generation capacity of the energy major by more than 15% to 1,076 MW.

Overall, the investment reflects the company’s strong focus on renewable energy generations since investors are increasingly pressing oil companies to drastically reduce carbon emissions, which is in line with the Paris climate goals. (Here's Why BP Signs Accord to Acquire Wind Farm in Indiana)

4.  Diamondback Energy FANG recently announced its downward revision of 2020 operational production in the wake of a weak oil pricing scenario. It also provided an update on its second-quarter production.

Evidently, Diamondback Energy aims to prune current-year net production to 290,000-305,000 barrels of oil equivalent per day (Boe/d), indicating a fall from the prior guidance of 295,000-310,000 Boe/d. This downtrend is induced by higher-than-expected volume contraction in the second quarter and fluctuating oil prices.

Management believes that the company can sustain fourth-quarter 2020 oil production through 2021 with a capital budget estimated to be 25-35% below 2020 capex, which is projected in the $1.8-1.9 billion band. (Diamondback Energy Cuts 2020 Output View, Provides Q2 Update)

5.   In its weekly release, Baker Hughes Company BKR reported another drop in the U.S. rig count. Rigs engaged in the exploration and production of oil and natural gas in the United States fell to an all-time low of 253 in the week through Jul 17, compared with the prior-week count of 258. The current national rig count is well below the prior year’s 954.

Investors should know that with the recent all-time low mark, the tally has touched record-low levels for 11 successive weeks, thanks to dented global energy demand owing to the coronavirus pandemic.
The oil rig count was 180 in the week through Jul 17, compared with 181 in the week ended Jul 10. The coronavirus-induced trough in prices and demand has pushed drilling activity lower. This automatically translates into lesser work for the oilfield service firms - companies that make it possible for upstream players to drill for oil and gas. This led the weekly tally of oil rigs to fall for 18 consecutive weeks. (US Oil & Gas Rig Tally Hits Record Lows for 10 Straight Weeks)

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%              -35.4%
CVX                  +2.3%           -23.6%
COP                 +1.7%           -36.1%
OXY                  -2.6%            -62.9%
SLB                  +4.7%           -51%
RIG                   +4.3%           -64.7%
VLO                  +3.4%            -38%
MPC                 +4.8%            -34.3%

The Energy Select Sector SPDR – a popular way to track energy companies – gained 3.2% last week. The best performer was downstream operator Marathon Petroleum MPC whose stock surged 4.8%.

But longer-term, over six months, the sector tracker is down 37.1%. Offshore driller Transocean was the major loser during this period, experiencing a 64.7% price plunge.

What’s Next in the Energy World?

As global oil consumption gradually ticks up, market participants will be closely tracking the regular releases to watch for signs that could further validate a rebound. In this context, the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly - will be on the energy traders' radar. Data on rig count from energy service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is also closely followed. Finally, there will be the 2020 Q2 earnings, with a few energy biggies coming out with quarterly results. 

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Noble Energy Inc. (NBL) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
Halliburton Company (HAL) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
Baker Hughes Company (BKR) : Free Stock Analysis Report
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