It was a week wherein oil futures closed above $40 and gas prices moved northward too.
On the news front, upstream biggie ConocoPhillips COP announced a major gas discovery offshore Norway, while shale producer Occidental Petroleum OXY reported September-quarter earnings.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures gained more than 8% to close at $40.13 per barrel, while natural gas prices rose around 4% in the week to finish at $2.995 per million Btu (MMBtu). In particular, the oil markets maintained their forward momentum from the previous week.
Oil prices ended sharply higher after drugmakers Pfizer and BioNTech announced successful data from their COVID-19 vaccine study. The breakthrough brightens chances of the drug’s emergency approval before the year end. For oil in particular, the development holds out hope of protection against the deadly pandemic that has crushed the commodity’s demand and caused a bloodbath for the energy-related stocks. A potential treatment is expected to revive economic and transport activity, leading to stronger crude demand.
Meanwhile, natural gas also eked out a weekly gain on favorable weather conditions and the growing appetite for liquefied natural gas (“LNG”).
Recap of the Week’s Most-Important Stories
1. ConocoPhillips announced the latest discovery of a natural-gas condensate in the Norwegian Sea. The significant discovery was made in the production license 1009 situated 22 miles northwest of the Heidrun oil and gas field, and 150 miles away from the Norwegian coast.
The company expects the well to hold about 50-190 million barrels of recoverable oil equivalent (“mmbbl”) on the basis of tentative estimates. The upstream energy giant added that it will undergo revaluations that will evaluate potential flow rates and the reservoir’s ultimate resource recovery. The appraisal will also help the company to determine plans for the well development.
On its part, the potentially largest discovery on the Norwegian Continental shelf strengthens ConocoPhillip’s footprint in the Norwegian Sea. Further, the company expects costs to extract oil and gas from the Warka discovery to be extremely low that will confirm the energy giant’s success in the Norwegian Continental Shelf in the years to come. (ConocoPhillips Confirms Offshore Norway Gas Discovery)
2. Houston-based oil and gas producer Occidental Petroleum reported third-quarter 2020 loss of 84 cents per share, wider than the Zacks Consensus Estimate of a loss of 70 cents. The company had recorded earnings of 11 cents per share in the prior-year quarter. Lower contribution from all segments led to the underperformance.
Occidental’s total production volume for the third quarter was 1,237 thousand barrels of oil equivalent per day (Mboe/d), which exceeded the midpoint of the guidance by 12 Mboe/d. The strong volumes were attributed to higher output from the Permian Resources region. Permian Resources production for the third quarter was 420 Mboe/d, which was up 7.7% year over year and above the higher end of the guided range of 392-408 Mboe/d.
As of Sep 30, 2020, the company had a long-term debt (net of current portion) of $35,899 million compared with $47,583 million on Dec 31, 2019. The decrease in debt level was due to effective management of debt since the acquisition of Anadarko. Cash from operations was $815 million, down from $1,863 million in the prior-year period. Meanwhile, Occidental’s total capital expenditure for the quarter under review was $246 million compared with $1,717 million invested in the year-ago period. (Occidental Posts Wider-Than-Expected Q3 Loss, Cuts Debt)
3. Oil and natural gas producers Bonanza Creek Energy BCEI and HighPoint Resources Corporation HPR announced that they have reached an agreement of consolidation worth $376 million. The deal involves merging of the two companies in the Denver-Julesburg (DJ) Basin to form a new entity as well as combine their property and production.
The transaction has been approved by the boards of each company. The new organization will own approximately 206,000 acres of leases in the DJ Basin with a day-to-day production capacity of 50,000 barrels per day (bpd) of oil. Further, the merged entity will be able to generate savings of roughly $31 million and free cash flow of approximately $130 million in 2021. In fact, the company plans to maintain a business model that focuses on free cash flow, with a greater emphasis on shareholder returns.
The strategic union is expected to close in early 2021. Following the completion, Bonanza Creek shareholders will hold a 68% stake in the combined company, with HighPoint’s stakeholders owning a 32% share. The oil and natural gas firm’s balance sheet is estimated to represent a cash of $50 million, $100 million senior unsecured notes and $150 million of reserve-based lending (“RBL”) debt in addition to $15 million of near-term capital expenditure savings.(Bonanza Creek &HighPoint Reach Merger Agreement Worth $376M)
4. Royal Dutch Shell RDS.A will cut down labor force at its PulauBukom oil refinery in Singapore by 38%, in light of a redevelopment to reduce CO2 emissions in the next three years. The decision was made owing to a 50% reduction in crude processing capacity.
The Anglo-Dutch energy and petrochemicals major decided to trim its Bukom workforce from 1,300 present-day workers to about 1,100 by 2021, which will be further downscaled to 800 workers by the end of 2023, with the earliest employee turnover at the final quarter of 2021. With global demand and profits stung by the spread of the coronavirus, the payroll cuts will help bolster the Zacks Rank #3 (Hold) Shell’s finances.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The PulauBukom, the largest wholly owned refinery of Shell, has a capacity to process 500,000 barrels per day (bpd) of oil. It is an integrated oil and petrochemical site with manufacturing facilities for fuels, lubricant base oils and specialty chemicals. The supermajor plans on limiting its global refining portfolio to six refining and petrochemical units, including the PulauBukom manufacturing facility, down from 14, by 2025 under its extensive restructuring plan. The curtailment, however, will cut the total processing capacity to 250,000 bpd, or about a fifth of its worldwide capacity. (Shell to Cut Jobs & Capacity at Singapore Refinery)
5. Equitrans Midstream Corporation’s ETRN Mountain Valley Pipeline (“MVP”) project construction in Appalachian Basin has been subjected to temporary suspension at the request of eight environmental groups challenging the pipeline. The 4th Circuit Court of Appeals issued the temporary halt of the key water crossing permits for the project’s completion in Virginia and West Virginia.
The proposed natural gas pipeline system is owned and operated by Mountain Valley Pipeline, LLC, a joint venture between Equitrans, NextEra Energy, Consolidated Edison, RGC Resources and AltaGas Ltd, with Equitrans holding a major stake. The project construction began in the first quarter of 2018 at an estimated cost of $3.5 billion. However, it was encumbered into a series of legal issues over federal permits, leading to time and cost overruns.
The MVP pipeline system, with a diameter of upto 42 inches, is expected to have a transmission capacity of about 2 billion cubic feet (Bcf) per day to markets in several regions of the United States. It stretches approximately 303 miles from the north-western West Virginia to Southern Virginia as an interstate pipeline regulated by the Federal Energy Regulatory Commission (FERC). (Equitrans' MVP Project Construction Suspended By Court)
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 +12.7% -9.1%
CVX +16.7% -0.2%
COP +21.1% -6.8%
OXY +17.9% -8.1%
SLB +18.3% +25.6%
RIG +8% -22.9%
VLO +33.4% -5.3%
MPC +19% +34.4%
The Energy Select Sector SPDR — a popular way to track energy companies — soared 17.1% last week. The best performer was refiner Valero Energy VLO whose stock surged 33.4%.
For the longer term, over six months, the sector tracker is up a marginal 0.3%. Another downstream operator, Marathon Petroleum MPC was this major gainer during the period, experiencing a 34.4% price appreciation.
What’s Next in the Energy World?
With rapidly rising new coronavirus cases around the world leading to the reimposition of lockdowns and the looming threat of another bout of oil demand weakness, market participants will be closely tracking the regular releases to watch for signs that could validate a revival. 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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Valero Energy Corporation (VLO) : Free Stock Analysis Report
ConocoPhillips (COP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
Bonanza Creek Energy, Inc. (BCEI) : Free Stock Analysis Report
Equitrans Midstream Corporation (ETRN) : Free Stock Analysis Report
HIGHPOINT RESOURCES CORP (HPR) : Free Stock Analysis Report
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