It was a week where oil prices logged a loss but natural gas futures ended higher.
On the news front, Energy Transfer LP ET, one of the largest midstream operators in the country, said on Monday it would buy SemGroup Corporation SEMG for roughly $5.1 billion. Meanwhile, supermajor ExxonMobil XOM confirmed its 14th oil discovery off the coast of Guyana.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 3% to close at $54.85 per barrel, natural gas prices moved up 4.7% for the week to finish at 2.614 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP Out of Alaska, Equinor Speeds Up Oil Field Start Up)
The U.S. crude benchmark notched finished lower even as a government report revealed a weekly decrease in domestic crude supplies that was much larger than anticipated. While EIA reported a fourth straight weekly inventory decline, crude prices fell after OPEC cut its forecast for oil demand growth this year and next.
Spooking markets further, the cartel decided to stick to its supply curb agreement till December as against expectations of deeper cuts from certain quarters. Reports that President Donald Trump may soften his stance against Iran resulted in further downside.
However, investors should note that this was before the weekend attacks on Saudi Arabia’s energy installations shook up the world of oil. On Saturday, unmanned aerial vehicles struck the state-run Saudi Arabian Oil Company’s (Aramco) Abqaiq plant – a key crude processing facility – and the Khurais complex, which houses the kingdom’s second-largest oilfield.
Such is the extent of damage that it is touted as the ‘single worst sudden disruption ever’ for the oil markets, surpassing the impact of the 1991 Persian Gulf War. WTI crude, the U.S. benchmark, soared nearly 15% on Monday, to $62.90 a barrel. This marked the sharpest daily price rise for the domestic benchmark grade since September 2008, putting the ‘black gold’ at a four-month high.
Meanwhile, natural gas prices notched another gain after the weekly inventory release showed a smaller-than-expected increase in supplies. The commodity also got a lift from expectations of above-average temperatures in many regions of the country over the next few days that could trigger strong power sector demand for the fuel.
Recap of the Week’s Most Important Stories
1. SemGroup recently announced that it has entered into a $5.1-billion contract to be acquired by pipeline giant Energy Transfer. The stock soared 61% in yesterday’s trade while units of Zacks Rank #3 (Hold) Energy Transfer fell more than 4%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The buyout agreement is expected to unlock significant value for shareholders of the combined entity, generating anticipated annual run-rate synergies of approximately $170 million consisting of $80 million of commercial and operational synergies, $50 million of financial savings and $40 million of Expense savings.
For the oil and natural gas midstream company in particular, the transaction is a win-win proposition for its shareholders in which they receive a substantial premium and get the opportunity to participate in one of the biggest midstream operators in the country with access to all major U.S. production basins. (Read more SemGroup Shares Surge on Takeover Deal by Energy Transfer)
2. ExxonMobil recently made its 14th oil discovery off the coast of the South American nation Guyana. The company found oil at the Tripletail-1 well in the prolific Stabroek block, wherein recoverable resource was earlier estimated to be more than 6 billion barrels of oil equivalent. Notably, the latest oil discovery at the Tripletail-1 well is the sixth in the Turbot area.
The Tripletail-1 well, which is located about five kilometers northeast of the Longtail discovery, is drilled at a depth of 2,003 meters of water. ExxonMobil found around 33 meters of oil-bearing sandstone reservoir, which is rich in quality, at the site. Notably, Noble Corporation plc’s (NE - Research Report) Noble Tom Madden drillship was used to drill the well. It will next head for the Uaru-1 well, placed around 10 kilometers east of the famous Liza field. The Noble Don Taylor drillship has been awarded a one-year contract by ExxonMobil for work offshore Guyana that is expected to commence this October.
ExxonMobil regards offshore Guyana as a key growth area. The latest discovery, which marks the fourth in the region this year, further strengthens the company’s upstream portfolio. Earlier, the energy major stated that the 26,800 square-kilometer Stabroek block has the potential to use more than five floating production, storage and offloading (FPSO) units. Total output from the block can exceed the 750,000 barrels of oil per day (BPD) mark by 2025. (Read more ExxonMobil Strikes Oil Offshore Guyana for the 14th Time)
3. Chesapeake Energy Corp. CHK recently entered into a privately-negotiated agreement to issue a total of 250,721,554 common shares in exchange for senior notes and convertible preferred stock. This move is expected to help the company to strengthen its balance sheet.
Notably, at the end of second-quarter 2019, Chesapeake had a cash balance of only $4 million. On the other hand, its net long-term debt was $9,701 million, leading to a debt-to-capitalization ratio of 69.6%. The figure was way above the industry average of 40.4%.
Moreover, the company’s debt-laden balance sheet restricts its ability to gain capital from the markets while losing credibility among shareholders. Though the recent move of issuance of common stock to retire a portion of its debt dilutes equity, management’s focus to tackle leverage is appreciable. (Read more Chesapeake Issues Common Stock to Reduce Debt Burden)
4. Baker Hughes, a GE company BHGE is once again likely to be an independent entity as its majority stock owner, General Electric Company (GE), is planning to further lower its interests in the oilfield service player.
Eventually, General Electric has been planning to exit the merger so that it could allocate the proceeds to lower its debt burden. In 2018, roughly $4 billion of Baker Hughes’ shares were sold by General Electric to bring down its ownership to 50.2%.
In its latest release, Baker Hughes announced that the U.S. industrial conglomerate is planning to further lower its stake to less than 50%. In a secondary offering, General Electric will be selling 105 million shares of Baker Hughes’ Class A common stock. The transaction also includes a $250-million private deal, wherein Baker Hughes will repurchase its Class B common stock from General Electric. Notably, with the sale of shares of Baker Hughes, General Electric is likely to receive $3 billion in cash. (Read more Will Baker Hughes be Better Off if GE Lowers Stake?)
5. Tullow Oil plc TUWOY recently announced its second oil discovery from the Joe-1 exploration well in the Guyana Basin. This discovery follows the company’s large and substantial oil discovery in August at its Jethro-1 exploration well in Guyana.
Joe-1 was drilled by Tullow Guyana B.V., Tullow Oil’s fully owned subsidiary on the Orinduik licence. Tullow Guyana B.V. holds 60% interest in the Orinduik block while TOTAL S.A.’s (TOT - Research Report) local unit owns 25%. The remaining stakes are held by Eco (Atlantic) Guyana Inc. With the completion of the exploration, the Stena Forth drill ship will return to Ghana.
This London-listed Irish exploring company will now assess data from the Joe-1 and Jethro-1 discoveries and await the results of the Carpa well to determine the ideal spin-off from the exploration and the ensuing appraisal program.(Read more Tullow Finds Oil for the 2nd Time in Orinduik Block, Guyana)
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.
Last 6 Months
Notwithstanding the decline in U.S. oil prices, the Energy Select Sector SPDR – a popular way to track energy companies – was up 4.2% last week. The best performer was offshore driller Transocean Ltd. RIG whose stock surged 13.7%.
Longer-term, over six months, the sector tracker is down 5%. On the other end of the spectrum this time, Transocean was the major loser during this period, experiencing a 31.4% price plunge.
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.
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Tullow Oil PLC (TUWOY) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Transocean Ltd. (RIG) : Free Stock Analysis Report
SemGroup Corporation (SEMG) : Free Stock Analysis Report
Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
Energy Transfer LP (ET) : Free Stock Analysis Report
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
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