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Oil & Gas Stock Roundup: Devon, Marathon's Q4, Matador's Midstream JV and More

Nilanjan Choudhury

It was a week where oil prices logged a modest decline and natural gas futures sank to a three-month low.

On the news front, upstream energy companies Devon Energy Corp. DVN and Marathon Oil Corp. MRO came out with better-than-expected fourth quarter bottom lines, while another independent producer Matador Resources Co. MTDR formed a midstream joint venture with a Houston private equity firm.

Overall, it was a rough week for the sector. West Texas Intermediate (WTI) crude futures edged down 0.9% to close at $53.40 per barrel, while natural gas prices fell 6.6% to $2.834 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: TOTAL's Q4, Parsley's Permian Deal and More.)

Oil prices again found themselves locked in a sideways trading range, as the tug-of-war over two powerful, opposing supply narratives continue.  

Reports have already indicated an impressive 90% compliance level from the OPEC producers who pledged output cuts in an effort to tackle the three-year supply glut. Speculation that OPEC could exercise an option to extend its production cut pact by another 6 months (to the end of 2017) provided further support.

However, a sixth-consecutive weekly rise in domestic oil supplies and a burgeoning rig count – pointing to the ever-increasing shale drilling activities – kept prices under check.

Oils-Energy Sector 5YR % Return

Oils-Energy Sector 5YR % Return

Meanwhile, natural gas turned sharply lower following a smaller-than-expected withdrawal.

Recap of the Week’s Most Important Stories

1.    Oil and gas producer Devon Energy Corp. reported fourth-quarter 2016 adjusted earnings per share of 25 cents, beating the Zacks Consensus Estimate of 19 cents by 31.6% on the back of successful cost control measures.    

At the field level, the company is effectively controlling costs. Thanks to its initiatives, lease operating expenses (LOE) were down 23.4% year over year to $367 million. The decline in LOE was primarily due to improved power and water-handling infrastructure, declining labor expense and lower supply chain cost.

However, asset sales meant that Devon’s fourth quarter volumes touched 537,000 barrels of oil equivalent per day (BOE/d), down 21.2% year over year. Devon Energy estimates total production from its assets in the first quarter of 2017 and full-year 2017 to be in the range of 535,000–555,000 BOE/d and 539,000–561,000 BOE/d, respectively.

Capital expenditure (capex) in the first quarter of 2017 and full-year 2017 is expected to be in the range of $525–$595 million and $2,285–$2,690 million, respectively. (Read more: Devon Energy Beats on Q4 Earnings, Gives '17 View.)

2.    Houston, TX-based Marathon Oil Corp. – a leading upstream energy firm – posted fourth quarter adjusted loss of 10 cents per share, narrower than the Zacks Consensus Estimate for a loss of 13 cents and the year-earlier adjusted loss of 48 cents. The better-than-expected results came thanks to the recovery in crude prices and cost control initiatives.

Marathon Oil’s North American upstream segment’s realized liquids (crude oil, condensate and natural gas liquids) price of $39.00 per barrel was higher than the year-earlier quarter level of $32.47 per barrel. The company’s International E&P unit also sold liquids at a price 30% higher than year-earlier quarter levels. The company’s exploration expenses for the quarter came at $34 million, significantly lower than $532 million in the year-earlier quarter. Moreover, Marathon Oil’s total quarterly cost and expenses fell 44% to 1,336 million.

Marathon Oil expects first-quarter 2017 North America E&P output available for sale in the range of 195,000–205,000 BOE/d, International E&P (excluding Libya) output in the range of 120,000–125,000 BOE/d and Oil Sands Mining output of 45,000–50,000 BOE/d. The Zacks Rank #3 (Hold) company said that quarterly volumes will be impacted by severe winter weather in North America and downtime events internationally. (Read more: Marathon Oil Q4 Loss Narrower than Expected.)

3.    U.S. onshore player Matador Resources Co. recently entered into a joint venture (JV) with Five Point Capital Partners for the development and expansion of the former’s Delaware Basin midstream assets of Matador. Five Point Capital is a private equity firm, which makes investments in the energy infrastructure sector. The joint venture has been named as San Mateo Midstream, LLC, in which 51% of the stake is held by Matador Resources and the remaining 49%, is held by Five Point Capital.

The funding of the joint venture includes an initial cash consideration of $176.4 million by Five Point Capital and $5.1 million along with midstream assets by Matador. Both the companies are also likely to make an additional investment of $150 million for the expansion of the asset base and the midstream operations. Matador will control the JV and will operate the midstream assets. The implied value of the midstream assets along with the gathering and disposal agreements amounted to $500 million.

It is expected that the JV will enhance the stakeholder’s value of both the parties involved as Delaware is one of the most promising and economic oil and gas basins in North America. The JV will provide midstream services to Matador as well as cater to the needs of the thirds party consumers and producers. Matador Resources currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

4.    Canadian energy explorer Encana Corp. ECA reported operating earnings per share of 9 cents, ahead of the Zacks Consensus Estimate of 3 cents. The outperformance came on the back of successful cost containment efforts. Total operating expenses halved from the fourth quarter of 2015 to $876 million. Encana reported operating costs of $152 million for the reported quarter, 11% lower than the year-ago quarter level. Meanwhile, transportation and processing expenses fell 38% to $186 million.

However, the bottom line slumped from the year-ago period profit of 13 cents per share amid sharply lower natural gas prices and volumes. In the fourth quarter, natural gas production declined approximately 19% year over year to 1,276 million cubic feet per day, while realized prices were $2.35 per thousand cubic feet, down 31% from the year-ago quarter level of $3.43  

Encana has set $1.6-$1.8 billion as 2017 capital expenditure budget, while total production for the year is expected to be between 320 thousand barrels of oil equivalent per day and 330 thousand barrels of oil equivalent per day. The company expects total natural gas output in the 1,150–1,200 million cubic feet per day band. Liquids production is anticipated to range between 125 and 130 thousand barrels per day. (Read more: Encana Beats Earnings Estimates in Q4, Sets 2017 Capex.)

5.    Oil and gas finder Chesapeake Energy Corp. CHK issued the estimates for its 2017 capital budget.

The projected capital spending for 2017 is in the range of $1.9–$2.5 billion compared with the 2016 expenditure of $1.65–$1.75 billion. This higher capital spending will likely be due to increased rig operations. During the year, the company is anticipated to operate 17 rigs as against 10 rigs in 2016. It is to be noted that during 2017, Chesapeake Energy is planning to spud and place on production roughly 400 and 450 gross operated wells, respectively. The company had spud and placed on production 213 and 428 wells, respectively, last year.

Chesapeake Energy also provided an outlook for 2017 production, which estimates output between 194 million barrels of oil equivalent (MMBoe) and 205 MMBoe. The 2017 production will likely comprise of 33–35 MMBoe of crude, 18–20 MMBoe of natural gas liquid and 860–900 billion cubic feet of natural gas. (Read more: Chesapeake Energy Releases 2017 Capital Budget Estimates.)

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

+0.20%

-8.04%

CVX

-2.27%

+6.55%

COP

-4.66%

+8.99%

OXY

-0.87%

-14.47%

SLB

-1.82%

-3.83%

RIG

-1.86%

+23.92%

VLO

-3.37%

+18.94%

TSO

+2.64%

+14.38%

Over the course of last week, ‘The Energy Select Sector SPDR’ was down 0.19%. Consequently, investors witnessed selling in most market heavyweights. The worst performer was Houston, TX-based energy explorer ConocoPhillips COP whose stock price fell 4.66%.

But longer-term, over the last 6 months, the sector tracker gained 1.37%. Offshore drilling giant Transocean Ltd. RIG was one of the major beneficiaries during this period, experiencing a 23.92% price increase.

What’s Next in the Energy World?

As usual, 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. However, the 2016 Q4 earnings again remain the primary focus this week, with the last batch of S&P 500 members coming out with quarterly results.

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Encana Corporation (ECA): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Devon Energy Corporation (DVN): Free Stock Analysis Report
 
Chesapeake Energy Corporation (CHK): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
Marathon Oil Corporation (MRO): Free Stock Analysis Report
 
Matador Resources Company (MTDR): Free Stock Analysis Report
 
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