It was a week where oil prices sank to the lowest finish of 2018, while natural gas futures hit more than four-year highs.
On the news front, shale producer Cimarex Energy Company XEC agreed to buy smaller rival Resolute Energy Corporation REN in a $1.6 billion deal, while contract driller Helmerich & Payne Inc. HP reported strong fiscal fourth-quarter 2018 results.
Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost 6.2% to close at $56.46 per barrel, natural gas prices surged 14.9% to $4.272 per million Btu (MMBtu).
The U.S. crude benchmark tumbled to its lowest settlement of the year, reflecting rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. U.S. waivers on Iranian sanctions and data showing drillers in the United States adding oil rigs also contributed to the losses.
Meanwhile, natural gas prices reached their highest point since February 2014 as inventories remain significantly below their five-year average amid predictions of strong demand with the early onset of cold weather.
Recap of the Week’s Most Important Stories
1. The Permian deal frenzy continues to sweep the U.S. oil industry, which has created a trend of consolidation in the prolific shale play. The latest energy player to join the bandwagon is Cimarex Energy. The Zacks Rank #2 (Buy) company is set to acquire Resolute Energy in a deal valued at about $1.6 billion to bolster Permian presence.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Subject to satisfactory closing conditions along with shareholders’ consent and other regulatory approvals, the deal is set for closure by the first quarter of 2019. Post the culmination of the deal, Cimarex will own about 94.4% stake in the combined entity and Resolute will hold the remaining 5.6%.
The deal is a prudent move by Cimarex as it is likely to be accretive to the company’s earnings and non-GAAP cash flow. The agreement will add around 21,100 net acres of Reeves County acreage to Cimarex’s portfolio, expanding its position by 34% to a total of 83,158 acres. Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, courtesy of the integration of asset and systems. (Read more Cimarex Buys Resolute for $1.6B to Expand Delaware Presence)
2. Helmerich & Payne recently released fiscal fourth-quarter 2018 results, wherein it delivered a comprehensive beat on the back of better-than-expected performance from the U.S. Land business, backed by higher rig margins and revenues. Precisely, operating income from the U.S. Land unit came in at $64.5 million, surpassing the Zacks Consensus Estimate of $60 million.
Importantly, after posting adjusted operating loss over the past 10 quarters, the company finally witnessed a turnaround this season, posting quarterly earnings of 19 cents a share, nominally surpassing the Zacks Consensus Estimate of 18 cents. The bottom line also compares favorably with the year-ago quarter’s loss of 13 cents a share.
Helmerich & Payne expects activity in the U.S. land segment to rise 4-5% sequentially during the first quarter of fiscal 2019. While average rig revenues per day are likely to be in the band of $24,500-$25,000, daily average rig cost is expected within $14,500-$14,900 during the said quarter. For fiscal 2019, Helmerich & Payne projects a capital budget of $650-$680 million. (Read more Helmerich & Payne Q4 Earnings Beat on Solid US Land Unit)
3. In a bid to sharpen its focus on the prolific Permian play, QEP Resources, Inc. QEP recently inked a deal to jettison its Haynesville shale holdings to Dallas-based private equity backed firm, Aethon Energy Management LLC.
Per the deal, Denver-based QEP Resources will divest its oil and gas producing properties, along with underdeveloped acreage and other midstream infrastructure in the Haynesville/Cotton Valley. The divested assets comprise acreage of around 49,700 net acres along with 137 gross operated wells. The region incorporates proved reserves of 159.8 million barrels of oil equivalent as of Dec 31, 2017. The transaction, valued at $735 million, is set for closure in January 2019.
The deal is in line with the company’s strategy to actually become a Permian pure play. Of late, QEP Resources has been entering into various strategic deals to streamline its portfolio and sharpen focus on the more profitable Permian Basin. (Read more QEP Resources to Exit Haynesville, Boost Permian Presence)
4. In a bid to bolster the Lubricants and Specialty Products business, HollyFrontier Corporation HFC recently inked a $655 million all-cash deal to acquire Sonneborn. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure in 2019.
Notably, privately-held Sonneborn is one of the leading providers of specialty hydrocarbon products like white oils, waxes and petrolatums. With manufacturing facilities across Europe and North America, the specialty hydrocarbons maker supplies its products to many cosmetic and personal care companies, along with food processing as well as pharmaceutical firms.
The asset base of Sonneborn nicely complements the Dallas-based refiner’s Lubricants and Specialty unit, and is in turn expected to make HollyFrontier a leading global supplier of specialty products post the acquisition. The acquisition will help the company to capitalize on Sonneborn’s diversified portfolio and brand power, as well as enable both the companies to pool their expertise and share their best practices. (Read more HollyFrontier to Buy Sonneborn, Rev Up Lubricants Unit)
5. Baker Hughes, a GE company BHGE announced that 92 million of its class A common shares will be sold by General Electric Company GE in a secondary offering. The leading oilfield service player added that additional 9.2 million class A stocks will be purchased by the underwriters if they execute their 30-day options.
In addition to this, Baker Hughes has decided to buy back 65 million of its class B common stocks from General Electric. Overall, the transaction that includes the divestment of 166.2 million Baker Hughes shares, through both stock buy-back program and secondary offering, will likely fetch General Electric nearly $4 billion in cash. It is to be noted that with the closure of the deal, the ownership stake of General Electric in Baker Hughes will fall to just more than 50% from 62.5%.
Although there might be an early separation of the companies, Baker Hughes will continue to have access to the digital technology of the industrial conglomerate. (Read more Baker Hughes, General Electric May Accelerate Parting Process)
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
Reflecting the week’s negative oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -1.9% return last week. The worst performer was offshore drilling giant Transocean Ltd. whose stock slumped 7.6%.
Longer-term, over six months, the sector tracker is down 17.7%. Oilfield service biggie Schlumberger was the major loser during this period, experiencing a 36.4% price decline.
What’s Next in the Energy World?
In this holiday-shortened week, 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.
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General Electric Company (GE) : Free Stock Analysis Report
HollyFrontier Corporation (HFC) : Free Stock Analysis Report
Helmerich & Payne, Inc. (HP) : Free Stock Analysis Report
QEP Resources, Inc. (QEP) : Free Stock Analysis Report
Cimarex Energy Co (XEC) : Free Stock Analysis Report
Resolute Energy Corporation (REN) : Free Stock Analysis Report
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
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