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Oil & Gas Stock Roundup: Conoco, Williams Partners' Asset Sales; NuStar's Permian Push and More

Nilanjan Choudhury

It was a week where oil prices tightened their grip over the $50-a-barrel level, while natural gas futures fell from a 2-month high.

On the news front, multinational oil company ConocoPhillips COP and energy infrastructure operator Williams Partners L.P. WPZ agreed to sell their respective assets in separate multibillion dollar deals, while another pipeline operator NuStar Energy L.P. NS became the latest firm to join the Permian rush with a $1.5 billion acquisition.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures added 1.8% to close at $53.18 per barrel, natural gas prices fell 1% to $3.227 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Sunoco's $3.3B Deal, SeaDrill's Bankruptcy Warning and More.)

Scoring its third consecutive weekly gain, oil rallied to its highest level since early March following increasing prospects of the OPEC-led cartel extending its production cut agreement by six months.

However, the continued growth in U.S. production and a burgeoning rig count – both pointing to the ever-increasing shale drilling activities – kept prices in check.

Meanwhile, natural gas turned lower after a ‘Neutral’ storage report and the onset of mild spring temperatures that will cut the fuel’s requirement. The demand situation is expected to improve once warm weather sets in and gas-fired electricity generation for air conditioning need picks up.

Recap of the Week’s Most Important Stories

1.    One of the world's largest independent oil producer ConocoPhillips entered into a definitive agreement to divest its interest in the San Juan Basin to an affiliate of privately held Hilcorp Energy Co. for about $3 billion of total proceeds.

Of the total proceeds, $2.7 billion will be in cash and about $300 million will be a contingent payment. The cash portion of the proceeds is subject to customary closing conditions. The contingent payment is effective from Jan 1, 2018, and has a duration of six years.

The latest transaction, along with the recently announced Canadian asset sales, is likely to take the company’s total consideration to over $16 billion in 2017. They will help ConocoPhillips’ to substantially reduce its exposure to North American gas and attain immediate step change improvement in its balance sheet and cash margins. These business moves will also help it to enhance return of cash to shareholders. (Read more: ConocoPhillips Divests San Juan Basin Assets for $3 Billion.)

2.    Energy infrastructure provider Williams Partners L.P. announced that it has agreed to divest 100% of its membership interest in Williams Olefins LLC, to Canada-based NOVA Chemicals for $2.1 billion in cash. Williams Olefins holds 88.46% undivided ownership interest in the Geismar, LA, olefins plant and related complex.

Moreover, on completion of the transaction – expected sometime in summer – Williams Partners’ subsidiaries will ink long-term supply and transportation agreements with NOVA Chemicals to supply feedstock to the Geismar olefins plant through Williams Partners’ Bayou Ethane pipeline system in the U.S. Gulf Coast. These agreements are expected to secure an important long-term fee-based revenue stream for the partnership.

The proceeds raised from the transaction will likely be utilized to pay off the partnership’s $850 million term loan and to finance a portion of the capital and investment expenditures that are part of the partnership’s widespread growth portfolio. The partnership believes that for federal tax purposes, any taxable gain from the transaction will be cushioned by its net operating loss carry-forwards. (Read more: Williams Partners Sells Stake in Williams Olefins for $2.1B.)

3.    San Antonio-based pipeline operator NuStar Energy L.P. signed an agreement to acquire the privately held Navigator Energy Services, LLC for $1.48 billion. The purchase of the Dallas-based pipeline company will mark the entry of NuStar in the Permian Basin. NuStar currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Navigator Energy owns and operates crude oil transportation, pipeline gathering and storage assets located in the Midland Basin of West Texas. The assets include about 500 miles of crude oil pipelines, a pipeline gathering system having 400,000 barrels per day of pumping capacity and about 1 million barrels of crude oil storage capacity.

The deal is in line with the NuStar’s strategy to expand its operations into one of the most prolific basins in the U.S. The region’s extensive pipeline network and abundant labor supplies will enable the partnership to gain greater margins at the current crude prices. (Read more: NuStar Energy Inks $1.48B Deal to Expand in Permian Basin.)

4.    North Atlantic Drilling Ltd., a majority-owned subsidiary of offshore drilling contractor SeaDrill Ltd. SDRL was awarded contracts for its jack-ups – West Elara and West Linus – by upstream energy giant ConocoPhillips. Under the 10-year contracts, the rigs are expected to operate at the Ekofisk field, offshore Norway. North Atlantic is expected to receive an additional backlog of $1.4 billion, excluding performance bonuses, from the contracts.

The new contract for the West Elara jack-up will become effective from Oct 2017. Up to Mar 2020, the rig will have fixed day rates and market indexed applicable rates afterward (through Oct 2027). On the other hand, the contract for the West Linus jack-up will extend from May 2019 to the end of 2028. The rig will be operated at market indexed rates.

The twin contracts are seen as a positive development for SeaDrill amid Chapter 11 bankruptcy fears if it couldn't successfully renegotiate terms to satisfy its creditors. (Read more: SeaDrill Unit Clinches Twin Contracts from ConocoPhillips.)

5.    World’s largest oilfield services provider Schlumberger Ltd. SLB inked an agreement with Argentina’s leading energy company, YPF S.A., to begin a shale oil pilot project in Bandurria Sur Block in Vaca Muerta, Neuquen. Signed in YPF’s Buenos Aires office, the deal entails a phased investment of about $390 million by Schlumberger. The scope of the agreement involves a material contribution in kind of its services at market price.

YPF will continue to operate the block. The commitment is also likely to involve the execution of different technical studies, the spudding of 26 pilot wells, and the building of new infrastructure. Further negotiations on the definite agreement are likely in the next couple of months. Schlumberger will obtain a 49% interest in the joint venture, while YPF will hold the remaining 51%. 

YPF’s partnership with Schlumberger is strategic as the latter has vast experience in the most important unconventional plays globally. Schlumberger also has an expert work team that improves its skills. (Read more: Schlumberger, YPF Ink Bandurria Sur Block Development Deal.)

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

-1.35%

-5.98%

CVX

-2.37%

+4.30%

COP

-1.78%

+20.42%

OXY

+0.74%

-11.77%

SLB

-0.40%

-3.87%

RIG

-6.91%

+18.99%

VLO

-0.30%

+17.54%

TSO

+1.30%

-2.54%

Despite the oil price gain over the course of last week, ‘The Energy Select Sector SPDR’ edged down 1.25%. Consequently, investors witnessed selling in most market heavyweights. The worst performer was offshore drilling giant Transocean Ltd. RIG whose stock price dived 6.91%.

Longer-term, over the last 6 months, the sector tracker is essentially unchanged. While the likes of independent oil producer ConocoPhillips gained a handsome 20.42% during this period, Houston-based energy explorer Occidental Petroleum Corp. OXY was one of the major laggards, experiencing a 11.77% price decline.

What’s Next in the Energy World?

In this week, market participants will be closely tracking the regular releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.

The 2017 Q1 earnings will also remain under scrutiny this week, with the oil services companies – providers of technical products and services to drillers of oil and gas wells – kicking off what is expected to be a good earnings season for U.S. energy firms.

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Williams Partners LP (WPZ): Free Stock Analysis Report
 
Nustar Energy L.P. (NS): Free Stock Analysis Report
 
Schlumberger N.V. (SLB): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Seadrill Limited (SDRL): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY): Free Stock Analysis Report
 
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