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Oil & Gas Stock Roundup: Devon's Asset Sale, Exxon's Brazil Win & More

Nilanjan Choudhury
Eco-Stim Energy Solutions, Inc. (ESES) delivered earnings and revenue surprises of -128.57% and -41.63%, respectively, for the quarter ended June 2018. Do the numbers hold clues to what lies ahead for the stock?

It was a week where oil prices ended largely unchanged and natural gas futures dropped.

On the news front, Devon Energy Corp. DVN agreed to sell interests in certain midstream assets apart from boosting its share buyback program, while Exxon Mobil Corp. XOM snapped up offshore stakes in Brazil’s fourth pre-salt bid round.

Overall, it wasn’t a good week for the sector. While West Texas Intermediate (WTI) crude futures remained essentially unchanged at $65.74 per barrel, natural gas prices fell some 2.4% to $2.89 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Exxon, Shell, Petrobras & More)

The U.S. oil benchmark was little changed during the week as fears of a looming drop in Iranian crude exports and tumbling Venezuelan production were offset by an unexpected build in U.S. crude stockpiles amid record production, together with steadily increasing rig count.

Meanwhile, natural gas prices moved southward last week as ample production continue to overshadow the commodity’s below-average storage levels.

Recap of the Week’s Most Important Stories

1.    Devon Energy decided to sell its 95 million units in the master limited partnership EnLink Midstream Partners, LP ENLK and 115 million units in the general partner EnLink Midstream, LLC to an affiliate of Global Infrastructure Partners (“GIP”) for $3.125 billion. This deal will lower Devon’s consolidated debt by nearly 40% and result in a decline in consolidated general and administrative expenses and interest cost by around $300 million annually, thereby boosting its margins.

The proceeds from the monetization of the midstream assets combined with that of the non-core E&P assets already sold, will enable Devon Energy to exceed its $5 billion divestiture target.

Devon’s board of directors also authorized a $3 billion increase in Devon’s previously announced $1 billion share-repurchase program, bringing the total repurchase program to $4 billion. The company is returning proceeds from the transaction to its shareholders. This will further improve the value of its shareholders. (Read more Devon to Monetize Midstream Assets, Buyback More Shares)

2.    Exxon Mobil has won the Uirapuru exploration block with co-venturers Equinor ASA EQNR and Petrogal Brasil during Brazil’s 4th pre-salt bid round.

Brazilian energy major Petrobras PBR has chosen to exercise its right to enter in the consortium and will be the operator with an equity interest of 30%. Exxon Mobil, Equinor and Petrogal Brasil will have a holding of 28%, 28% and 14%, respectively.

In 2018, Exxon Mobil intends to acquire seismic coverage on more than 7,500 square miles. 3-D seismic survey work is already in progress on two blocks in the Northern Campos area offshore Brazil. The company is striving to get the required approvals to begin drilling activities.

The latest award boosts Exxon Mobil’s holding in Brazil’s pre-salt basins by adding net acres of about 88,900 to its portfolio. The company has a total exposure to more than 2.2 million net acres in the country, with interests in a total of 25 blocks offshore Brazil. (Read more Exxon Mobil Expands Footprint in Brazil With Uirapuru Block)

3.    SeaDrill Limited SDRL recently announced that it anticipates emerging from bankruptcy by the first half of July, bringing in pleasant news for its investors. Notably, the Zacks Rank #3 (Hold) company’s shares have rallied about 60% over a month, handily outperforming the industry’s decline of 4.4%. The elevated investors’ optimism is a result of the company’s restructuring plan that won approval from the U.S. Bankruptcy Court in April, after almost a year-long struggle to survive. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s financial restructuring plan received approval from 99.8% of the creditors. Per the restructuring agreement, the international offshore drilling company will witness capital injection of $1.08 billion, which would comprise $880 million secured loans and $200 million equity. The existing shareholders will receive only 1.9% stake in the post-restructuring equity.

Under the restructuring plan, banks will defer the maturities of all secured credit facilities worth $5.7 billion by five years, with no amortization payments til 2020, along with significant covenant relief. The plan will also witness the conversion of $2.3 billion worth unsecured bonds into 15% of equity in the restructured company.

With Seadrill nearing bankruptcy exit with its restructuring plan, it will improve the liquidity position of the company and provide growth opportunities. SeaDrill, having one of the youngest and most advanced drilling fleets, will be poised to secure more contracts post restructuring, helping the company to stabilize its revenues. (Read more SeaDrill Expects to Emerge From Bankruptcy in July)

4.    Petrobras 2017-2018 divestment plans could be in jeopardy, as the Brazilian Federal court suspended the company’s $7 billion deal with Engie SA. The court recently passed a ruling against the sale of Petrobras’ natural gas pipeline unit, Transportadora Associada de Gás (‘TAG’) to France-based Engie SA.

The company had announced the sale of its wholly-owned subsidiary, TAG, last year. TAG’s gas pipeline system spanning 4,500 kilometers is primarily located in the north and northeast of Brazil. It can transport up to 74.7 million cubic feet per day, which is fully contracted through long-term agreements with ship-or-pay clauses.

The court halted the transaction due to discrepancies in the way Petrobras advanced with the sale. It is believed that the sale was not publicized well enough to stimulate ample competition. Petrobras is taking necessary legal steps to protect the interest of its shareholders.

The sale of TAG is major part of Petrobras’ divestiture program of 2017-2018. The company plans to sell assets worth $21 billion over the said time frame.

These divestment plans are in sync with the company’s strategy to reduce its debt burden and reinstate its investment grade rating and financial health. Further, it will also help the company gain additional liquidity, as it intends to increase investment in the ultra-deepwater projects. (Read more Brazil Court Halts Petrobras' $7-Billion Asset Sale)

5.    Repsol, S.A. REPYY recently announced its intention to increase its dividend by 8% annually. This will result in pushing the dividend per share to €0.95 ($1.12) in 2019 and €1 ($1.18) in 2020, from the current level of €0.90. The company also intends to carry out share repurchase programs to avoid dilution. This came as part of its updated targets for its 2016-2020 strategic plans.

The company also has plans to invest around €15 billion ($17.6 billion) in its operations during the 2018-2020 timeframe. The company sets its new targets based on the expectation that Brent benchmark will be above $50 per barrel during this period.

The company intends to increase its exploration and production activities through 2020, while achieving a 8% production growth rate. Repsol will employ €8 billion in upstream businesses, which is expected to help the company reach its production goal of 750 thousand barrels of oil equivalent per day by 2020.

Repsol will invest €4.2 billion in its downstream projects, which also includes international expansion. (Read more Repsol Updates Strategies & Goals, Hikes Dividend)

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

+2.2%

+0.4%

CVX

+2.1%

+6.6%

COP

+1.7%

+35.7%

OXY

+1.3%

+23.1%

SLB

+1.4%

+8.9%

RIG

+0.8%

+26.7%

VLO

-3.3%

+38.7%

MPC

-3.6%

+21.2%

 

The Energy Select Sector SPDR – a popular way to track energy companies – generated a +0.7% return last week. The best performer was oil major Exxon Mobil, whose stock rose 2.2%.

Longer-term, over six months, the sector tracker is up 11.1%. Independent refiner and marketer, Valero Energy Corp. is far and away the major gainer during this period, experiencing a 38.7% price appreciation.

What’s Next in the Energy World?

As usual, 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. However, all eyes are on the oil producers’ meeting set for Jun 22 in Vienna, which will decide what happens next regarding their supply curb policy.

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EnLink Midstream Partners, LP (ENLK) : Free Stock Analysis Report
 
Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Repsol SA (REPYY) : Free Stock Analysis Report
 
Seadrill Limited (SDRL) : Free Stock Analysis Report
 
Devon Energy Corporation (DVN) : Free Stock Analysis Report
 
Statoil ASA (EQNR) : Free Stock Analysis Report
 
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