It was a week which saw oil prices trail the movement in the dollar and settle lower, while natural gas futures rose to near one-year highs on repeated below-average supply additions.
On the news front, Exxon Mobil Corp. XOM decided to walk out of the Alaska LNG project, while another supermajor Royal Dutch Shell plc RDS.A agreed to offload certain oil blocks in the Gulf of Mexico for $425 million.
Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 3% to close at $47.64 per barrel, natural gas prices ended up over 11% to $2.871 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Exxon, Chevron & Hess to Bid Jointly for Mexico Drilling Rights.)
Oil prices charted a weekly loss following a big rally in the dollar that made the greenback-priced crude expensive for investors holding foreign currency. The U.S. currency was boosted by comments from Fed Chair Janet Yellen in Jackson Hole, Wyo. about possible increase in interest rate this year. Things further worsened for oil with the release of U.S. Energy Department's report showing a big build in domestic crude stocks.
Oils-Energy Sector Price Index
Oils-Energy Sector Price Index
Natural gas, on the other hand, rallied as successive below-average builds on the back of strong power sector consumption keep on cutting into the year-over-year storage surplus. Further support came by way of predictions of strong cooling demand with forecasts of warmer temperature across the country over the next few days.
Recap of the Week’s Most Important Stories
1. The world’s largest publicly traded oil company Exxon Mobil Corp., has decided against investing further in the proposed Alaska LNG facility as the project is slated to change into a state-owned endeavor.
The decision of the company is based on the oversupply of natural gas that has depressed prices. Also, the release of a Wood McKenzie report earlier this week that deemed the Alaskan project as “one of the least competitive” of proposed liquefied natural gas plants worldwide resulted in the move.
The project, known as Alaska LNG, is estimated to cost between $45 billion and $65 billion. In Nov 2015, the Alaskan government paid $65 million for the 25% stake TransCanada Corp. held in the project. While Exxon Mobil holds about 33.3% in Alaska LNG, the other stake owners are BP plc and ConocoPhillips, each holding 20%. These companies too have indicated their possibility of withdrawing from the project.
2. Europe’s largest energy producer Royal Dutch Shell plc has agreed to sell certain properties in the Gulf of Mexico to Houston-based independent energy company EnVen Energy Corp. The transaction – worth $425 million in cash, plus royalty interests – is expected to close in October.
The to-be-sold acreage include Shell's 100% record title interest in the Brutus/Glider assets covering Green Canyon blocks 114, 158, 202, and 248. Apart from the Brutus tension leg platform (‘TLP’), the properties consist of the Glider subsea production unit, and the oil and gas lateral pipelines used to extract hydrocarbons from the TLP.
The Brutus/Glider asset sale – having a combined current production estimate of about 25,000 barrels of oil equivalent per day – is in line with the Anglo-Dutch group's global divestment plans to get rid of some $6-$8 billion of properties this year to pay for its BG Group acquisition.
3. U.S. energy major Chevron Corp. CVX has entered into a deal with a Chinese distributor – ENN LNG Trading Co. Ltd. – for shipping its liquefied natural gas (‘LNG’) from the company’s existing projects that include Australian LNG interests at Gorgon, Wheatstone and the North West Shelf.
Per the Sales and Purchase Agreement (‘SPA’), Chevron will likely deliver up to 650,000 metric tons of LNG every year, for a span of 10 years, from Chevron’s global supply portfolio. The company anticipates the supply to start either by 2018 or by the first half of 2019.
The latest Chinese agreement follows Chevron’s multiple deals with Japanese and South Korean companies to sell a major portion of LNG from its developments. the sales contract represents an important milestone in Chevron’s efforts to commercialize its share of LNG from various projects.
4. Brazil's state-run energy giant Petrobras PBR received clearance from a Brazilian federal judge to sell 49% stake in its Gaspetro natural-gas distribution unit to Japan's Mitsui & Co.
Petrobras sold the stake to Mitsui for 1.93 billion reais in December. The deal was, however, blocked by a federal judge a month later on allegations that the sale was not subject to an open public sale process. Also, questions regarding the company’s possible repetition of some of the actions that had led to a massive corruption scandal were raised.
However, the latest ruling by a different judge okayed the sale on grounds that the previous judgment was without merit. (Read more: Petrobras Unit Sale to Mitsui Permitted by Brazilian Judge.)
5. Chinese energy giant PetroChina Co. Ltd. PTR announced first-half 2016 earnings of RMB 531 million or RMB 0.003 per diluted share, compared with RMB 25.4 billion or RMB 0.14 per diluted share a year earlier. Moreover, China’s dominant oil and gas producer’s total revenue for the six months under consideration fell 15.8% from the comparable 2015 period to RMB 739.1 billion.
The negative comparisons can be primarily attributable to continued collapse in oil prices, which pummeled its biggest unit – exploration and production – to a loss. Average realized crude oil price during the first six months of 2016 was $33.09 per barrel, representing a 36.5% decrease from $52.10 per barrel in the year ago period.
At the end of the first half of 2016, PetroChina’s cash balance was RMB 101.3 billion, while cash flow from operating activities was RMB 111.8 billion. Capital expenditure for the period reached RMB 50.9 billion, down 17.5% from the year-ago level. (Read more: PetroChina Half-Year Profits Collapse on Crude Slump.)
The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.
Last 6 Months
Over the course of last week, ‘The Energy Select Sector SPDR’ was down 1.20% on dollar gains. Consequently, investors witnessed selling in most market heavyweights. The worst performer was offshore drilling giant Transocean Ltd. RIG whose stock price fell 2.88%.
But longer-term, over the last 6 months, the sector tracker has jumped 20.31%. Houston-based energy major ConocoPhillips COP was the main beneficiary during this period, experiencing a 22.90% price increase.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular weekly 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.
Now See Our Private Investment Ideas
While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PETROBRAS-ADR C (PBR): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
PETROCHINA ADR (PTR): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
CONOCOPHILLIPS (COP): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research