It was a week when both oil and natural gas prices settled higher.
On the news front, the headline came from ConocoPhillips’ COP $9.7 billion all-stock acquisition of Concho Resources CXO. Meanwhile, oilfield service majors Schlumberger SLB and Halliburton HAL reported third-quarter earnings.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures edged up 0.7% to close at $40.88 per barrel, while natural gas prices increased 1.2% for the week to finish at 2.773 per million Btu (MMBtu). Both oil and gas markets maintained the positive momentum from the previous week, when they rose sharply.
Coming back to the week ended Oct 16, oil prices posted a marginal gain as decrease in crude and fuel supplies, plus storm-related production disruptions outweighed the threat to the commodity’s demand from the resurgence of the coronavirus around the world.
Natural gas finished higher too following a smaller-than-expected injection and expectations of cold weather that should result in the heating fuel’s increased demand.
Recap of the Week’s Most-Important Stories
1. ConocoPhillips has confirmed its decision to buy Concho Resources in an all-stock transaction, valued at $9.7 billion. Amid the pandemic, this has been the largest oil accord in the United States.
Per the agreement, each shareholder will get 1.46 shares of ConocoPhillips. Thus, the transaction has valued Concho at a 15% premium to its closing price on Oct 13. Once the deal closes in the first quarter of 2021, ConocoPhillips will be able to expand its footprint in the Permian, the most prolific basin in the United States. Importantly, the deal will make the combined entity the largest independent oil firm in America.
Importantly, by 2022, the combined firm will be able to save cost and capital of $500 million, annually, as estimated by both ConocoPhillips and Concho. Thus, it has become increasingly evident that the oil industry is turning to acquisitions and mergers with an aim of cutting costs that will help combat the pandemic-induced stretch of oil price slump. (ConocoPhillips Confirms $9.7B Acquisition Deal With Concho)
2. Schlumberger’s third-quarter 2020 earnings of 16 cents per share (excluding charges and credits) surpassed the Zacks Consensus Estimate by 3 cents. The better-than-expected bottom line can be attributed to improved completion activities on drilled but uncompleted (“DUC”) wells in onshore United States.
Despite the company’s $273 million of severance payments through the September quarter, the oilfield service firm was able to generate free cash flow of $226 million. Capital expenditures in the quarter were recorded at $200 million. As of Sep 30, 2020, the Zacks Rank #3 (Hold) company had approximately $3,837 million in cash and short-term investments plus $16,471 million of long-term debt. This represented a debt-to-capitalization ratio of 58.9%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In the December quarter, the company expects completion activities of DUC wells in the land market of the United States to keep improving. Moreover, Schlumberger believes that there will be modest resumption of drilling operations in America and Canada in the fourth quarter. (Schlumberger Q3 Earnings Beat Estimates, Fall Y/Y)
3. Smaller rival Halliburton also delivered better-than-expected third-quarter 2020 earnings as the Completion and Production segment outperformed the Zacks Consensus Estimate. The company reported earnings of 11 cents per share, surpassing the Zacks Consensus Estimate of 8 cents.
Operating income from the Completion and Production segment came in at $212 million, beating the Zacks Consensus Estimate of $187 million. The division’s performance benefited from improved stimulation activity and artificial lift sales in North America land, higher activity across multiple product service lines in Argentina as well as increased pipeline services, internationally.
Management at this world’s biggest provider of hydraulic fracking noted that although the activity levels in North America during the September quarter ramped down, the company continues to benefit from the changing market dynamics through an excellent execution and regulation of the controllable factors. As operations in the global markets slow down, the North America industry structure steadily improve with stabilizing activities. (Halliburton Q3 Earnings Top Estimates, Sales Miss Mark)
4. BP plc BP recently announced the commencement of production, ahead of schedule, from the Block 61 Phase 2 Ghazeer gas field in Oman. The production started 33 months after the approval of development. It was earlier expected to come online in 2021.
The block’s total daily production capacity is estimated to increase to 1.5 billion cubic feet of natural gas and more than 65,000 barrels of associated condensate. The block has a recoverable natural gas resource of 10.5 trillion cubic feet. It is expected to address 35% of the country’s total natural gas demand. As such, production from the giant Ghazeer natural gas field will likely benefit the local industries and further boost the economy of Oman.
The block holds significance as one of the largest tight gas accumulations in the Middle East. The produced commodity from the block is used for domestic consumption. It also supplies feedstock for Oman LNG. The British energy giant’s Trading and Shipping arm buys 1.1 million tons of liquefied natural gas per year from Oman LNG through a seven-year deal, which commenced in 2018. (BP Kick-Starts Ghazeer Gas Production Ahead of Schedule)
5. Diamondback Energy FANG recently issued a preliminary update on its third-quarter production and reiterated its fourth-quarter guidance. Management believes that the company can sustain fourth-quarter 2020 oil production through 2021 with the capital budget estimated to be 25-35% below its 2020 capex level, which is projected in the $1.8-1.9 billion band.
The company’s third-quarter 2020 production of oil and natural gas averaged at 287,300 Boe/d with oil output of 170,000 barrels per day. The average realized unhedged crude oil price in the period was $38.75 per barrel while that of natural gas liquids was $12.09. The same for natural gas was $1.11 per thousand cubic feet. Overall, the company fetched $26.75 per barrel of oil equivalent.
Meanwhile, Diamondback Energy reaffirms its fourth-quarter production guidance of 280-290 thousand barrels of oil equivalent per day (MBOE/d) and full-year output guidance of 290-305 MBOE/d. It also reiterates its current-year cash capital expenditure guidance between $1.8 billion and $1.9 billion. (Diamondback Energy Gives Preliminary Update on Q3 Production)
The following table shows the price movement of some the major oil and gas players over past week and during the last six months.
Company Last Week Last 6 Months
XOM -1.8% -21.8%
CVX -1.5% -18.2%
COP -2.7% -7.3%
OXY -6.7% -28%
SLB -7.8% -1.8%
RIG -8.1% -33.6%
VLO -7.8% -24.1%
MPC -2.5% +11%
The Energy Select Sector SPDR — a popular way to track energy companies — lost 1.9% last week. The worst performer was offshore driller Transocean RIG whose stock slumped 8.1%.
For the longer term, over six months, the sector tracker has lost 13%.Transocean was the major loser during the period also, experiencing a 33.6% price decline.
What’s Next in the Energy World?
As global oil consumption gradually ticks up from the depths of coronavirus, 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’s statistics on oil and natural gas — one of the few solid indicators that comes out regularly — will be on 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.
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Transocean Ltd. (RIG) : Free Stock Analysis Report
Schlumberger Limited (SLB) : Free Stock Analysis Report
Halliburton Company (HAL) : Free Stock Analysis Report
ConocoPhillips (COP) : Free Stock Analysis Report
Concho Resources Inc. (CXO) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
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