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Oil & Gas Stock Roundup: Exxon Ups Emission Goal, Shell's Q4 Update, Flurry of M&A

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·9 min read
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It was a week when both oil and natural gas prices settled higher.

On the news front, U.S. energy major ExxonMobil XOM offered further reductions to its greenhouse gas emissions target, while European peer Royal Dutch Shell RDS.A issued an update on its upcoming Q4 earnings. Meanwhile, a slew of acquisitions was announced by Diamondback Energy FANG, Murphy USA MUSA and Earthstone Energy ESTE.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures gained 5.4% to close at $49.10 per barrel, while natural gas prices were up 4.2% in the week to finish at $2.70 per million Btu (MMBtu). In particular, the oil markets maintained their forward momentum from the previous six weeks and approached the $50-a-barrel mark.

Oil prices ended higher as the market’s vaccine-related optimism, a larger-than-expected domestic crude draw and relief associated with the second economic-rescue plan outweighed tightened lockdowns in parts of Europe and the United States, coupled with additions to fuel stocks.

Natural gas finished higher too after the U.S. Energy Department's inventory release showed the season’s first triple-digit withdrawal from natural gas storage. The fuel was also buoyed by favorable weather predictions and record liquefied natural gas (“LNG”) feed gas deliveries.

Recap of the Week’s Most-Important Stories

1.  ExxonMobil has chalked out a new plan to lower greenhouse gas emissions over the next five years after the leading integrated energy firm was recently targeted by activist investors over climate change concerns.

The new 2025 targets comprise plans to cut intensity of emissions from upstream operations by 15% to 20% from the 2016 levels. Over the five-year span, ExxonMobil will also reduce methane intensity by 40% to 50% and flaring intensity by 35% to 45%. The target for elimination of routine flaring in the next decade is another plan, which the energy giant said will align with the initiative of World Bank.

Notably, the company’s new climate change plans are applicable for scope 1 and scope 2 emissions, suggesting emissions from own operations and by providers of power. However, the targets will not cover emissions from burning of oil, which signifies scope 3 emissions. Importantly, like European energy giants, ExxonMobil has agreed to provide scope 3 emissions data every year starting 2021. (ExxonMobil Unveils a New Emission-Reduction Program)

2.  Royal Dutch Shell recently provided an update on its fourth-quarter 2020 guidance and envisioned its post-tax impairment charges between $3.5 billion and $4.5 billion for the period. This write-down, which follows the company’s massive impairment charge of $16.8 billion during the second quarter, comes as a result of the coronavirus and its associated demand deceleration, wiping billions off the oil and natural gas asset value.

The upstream production is projected between 2,275 and 2,350 thousand barrels of oil equivalent per day (boe/d).Taking into account the current realized liquid prices, Shell expects to incur an adjusted loss in this segment. Shell estimates fourth-quarter oil product sales in the band of 4,000-5,000 thousand barrels per day. Although this indicates a 22.3% decrease from the year-earlier reported number, the upper end of the estimate is assumed to be met.

The company’s chemical sales volumes are predicted between 3,600 and 3,900 thousand tons with the plant utilization of 77-81% of the producing volumes. Further, Shell expects chemicals base and intermediate margins to improve from the sequential quarter’s levels. The company expects fourth-quarter LNG liquefaction volumes to contract to 8-8.6 million tons from its previous year’s quarterly output of 9.21 million tons. (Shell Renews Q4 View, Foresees $3.5-$4.5B Write-Offs)

3.  Diamondback Energy has reached an agreement to acquire QEP Resources QEP in an all-stock deal worth $2.2 billion, comprising $1.6-billion net debt as of Sep 30. The deal is the latest among the spree of U.S. oil mergers and acquisitions, which are strategic measures taken by the shale players to combat the coronavirus-induced weak crude price scenario.

Per the deal, Diamondback will get nearly 49,000 more acres in the Midland area of the leading U.S. oil field, the Permian Basin in Texas, which is the much-coveted prospect in the latest slew of acquisitions. It’s noteworthy that the company is already one of the top producers in the Permian Basin. Therefore, the QEP transaction is a strategic fit for the Zacks Rank #3 (Hold) company, which will further strengthen its position in the United States’ hottest shale region of lowest cost. If the deal gets through, Diamondback will significantly expand its production and proved reserves in the Midland Basin acreage.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Management also informed that it is purchasing lease interests and assets in Midland from the privately held Guidon Operating LLC for approximately $850 million. The QEP Resources buyout combined with the acquisition of assets from Guidon Operating LLC will add to Diamondback’s total leasehold interests to above 276,000 net surface acres in the Midland Basin. (Diamondback Inks Acquisition Deal With QEP Resources)

4.  Murphy USA has reached an agreement to acquire QuickChek Corporation in an all-cash deal value of $645 million. The purchase amount comprises estimated tax benefits worth $20 million for a net after-tax purchase price of $625 million. The company will pay for the transaction with the help of cash on hand, prevailing credit facilities and new debt. Also, Murphy USA took committed funding from the Royal Bank of Canada.

With 157 stores located across Central and Northern New Jersey and the New York metro locale, QuickChek is a family-owned chain that offers a best-in-class food and beverage model with a strong regional brand and mostly caters to higher customer traffic. It provides fast-service restaurant style food besides convenience items.

In October, Murphy USA announced plans for a revised capital allocation strategy that focuses on bettering its food and beverage offer at the existing and upcoming locations. Per management, the acquisition is in sync with the company’s strategy to improve its capital allocation. (Murphy USA Inks $645M Acquisition Deal With QuickChek)

5.  Earthstone Energy recently agreed to acquire a privately held oil and gas exploration and production company, Independence Resources Management, LLC. The transaction is expected to be valued at less than $185.9 million, comprising $135.2 million in cash and 12.7 million shares of Class A common stock of Earthstone. The current market volatility might trigger more such acquisitions in the oil and gas space.

The deal is expected to close in the March quarter of 2021. The acquiree operates in the Midland Basin, wherein production averaged 8,780 barrels of oil equivalent per day (Boe/d) in third-quarter 2020, of which 66% was crude oil. It has around 4,900 core net acres in the Midland and Ector counties. Moreover, in the eastern Midland Basin, the company has 38,500 net acres.

The move of adding the complementary Midland Basin properties is expected to boost Earthstone’s greater Permian Basin production capacity and adjusted EBITDAX by 50%. However, it is expected to have minimal impact on the acquirer’s leverage. Notably, pro-forma third-quarter production for the combined entity is estimated to rise 52% following the acquisition. As such, Independence Resources Management’s low-cost and high-margin assets will likely enhance Earthstone’s portfolio. Moreover, the deal is expected to support Earthstone’s free cash flow generation capacity. (Earthstone to Acquire E&P Firm, Add Midland Basin Assets)

Price Performance

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                 -2.4%               -9.6%
CVX                 -5.7%                -6%
COP                -5.7%                -7.6%
OXY                 -11.3%              -12.3%
SLB                 -2.7%                +9.9%
RIG                  -1.6%                +10.5%
VLO                 -7.2%                -13.7%
MPC                -6%                    +3%

The Energy Select Sector SPDR — a popular way to track energy companies — was down 4.2% last week. The worst performer was oil and gas producer Occidental Petroleum OXY whose stock slumped 11.3%.

For the longer term, over six months, the sector tracker is down 2.9%.Refining giant Valero Energy was the major loser during the period, experiencing a 13.7% price depreciation.

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. Finally, news related to coronavirus vaccination will be of utmost importance as well.

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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
QEP Resources, Inc. (QEP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
Murphy USA Inc. (MUSA) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
Earthstone Energy, Inc. (ESTE) : Free Stock Analysis Report
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