It was a week where oil prices logged a decline but natural gas futures tallied another rise.
On the news front, ExxonMobil XOM provided an update on second-quarter 2019 earnings, while TC Energy TRP said that it would sell some assets of Columbia Midstream Group for $1.28 billion.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 1.6% to close at $57.51 per barrel, natural gas prices moved up 4.8% for the week to finish at $2.418 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Shell's Canada Asset Sale, Marathon Oil's UK Exit & More)
The U.S. crude benchmark fell for the first time in three weeks as expectations of moderating global demand overshadowed the OPEC cartel’s widely expected decision to prolong output cuts until March 2020. On a further bearish note, the U.S. Energy Department's latest inventory release showed that crude stockpiles recorded a much smaller-than-anticipated weekly draw.
Meanwhile, natural gas prices gained as the market participants shrugged off larger-than-expected climb in U.S. supplies and chose to focus on a bullish near-term weather forecast that could trigger strong power sector demand for the fuel.
Recap of the Week’s Most Important Stories
1. ExxonMobil recently provided an update on second-quarter 2019 earnings, which are expected to get a boost from refining margins. The company is expected to release second-quarter results on Jul 26, 2019.
The largest publicly traded energy company expects crude price improvement to boost second-quarter profit by $400-$600 million sequentially. First-quarter 2019 earnings from the Upstream business came in at almost $3 billion. However, tumbling of natural gas prices to multi-year lows — attributed to middling demand — can offset the positives from liquid price improvement. Notably, in the June quarter of 2018, it recorded total profit of $3,040 million, which was primarily supported by higher commodity prices.
The Downstream segment, which incurred a loss of $256 million in first-quarter 2019, is expected to witness a $300-$400 million improvement in margins in the second quarter. The company recorded $724 million in profits from the segment in the year-ago quarter. (Read more ExxonMobil's Downstream Margins to Boost Q2 Earnings)
2. In a bid to ramp up core pipeline growth projects, TC Energy is set to jettison Columbia Midstream Group to UGI Energy Services — a subsidiary of energy services holding company UGI Corporation — for $1.28 billion (C$1.7 billion).
Notably, Columbia Midstream Group owns five natural gas pipeline assets, with a transportation capacity of 2,675,000 million British Thermal units per day. The assets to be sold will not include Columbia Energy Ventures and Columbia Gas Transmission network of interstate pipelines in the Appalachian Basin. Subject to satisfactory closing conditions and regulatory approvals, the deal is set for closure in third-quarter 2019.
The latest deal with UGI Energy advances TC Energy’s efforts to offload non-core assets for raising funds to pay for key pipelines like Keystone XL and other growth projects across North America. (Read more TC Energy to Vend Columbia Midstream Group for $1.28B)
3. In a bid to streamline portfolio, Encana Corporation ECA is set to jettison its acreage in Oklahoma’s Arkoma Basin for $165 million to an undisclosed buyer. The Canadian energy explorer got hold of Arkoma assets on completion of the acquisition of Newfield Exploration earlier this year. Subject to satisfactory closing conditions and regulatory approvals, the transaction is set for closure in third-quarter 2019.
The assets to be sold include 140,000 net acres in the Arkoma Basin, with a production capacity of around 77 million cubic feet per day (98% gas). As we know, the Zacks Rank #3 (Hold) company has successfully re-adjusted the asset base via acquisitions and divestments, transitioning to the more profitable crude over a couple of years.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Of late, Encana is more focused on oil production from Permian and Montney shale plays, along with the Anadarko play (which was inherited by Encana after the completion of the Newfield buyout), instead of the natural-gas heavy Arkoma Basin. As such, the divestment deal is in sync with the company’s goals of crude transition and monetization of non-core assets to strengthen the balance sheet.(Read more Encana to Monetize Arkoma Assets to Focus on Core Plays)
4. Ensco Rowan plc ESV recently announced that the company is planning to change its name to Valaris plc. Post the change of name, which will be effective Jul 31, 2019, the stock will trade under the new ticker “VAL” in the NYSE. The company came to its existing form following the completion of the merger of Rowan and Ensco in April 2019.
Notably, for full-year 2019 and beyond, the merger is expected to result in annual pre-tax expense synergies of about $165 million. Based on the anticipated annual savings, the union is likely to be accretive on a discounted cash flow basis. The synergies from the deal are expected to create around $1.1 billion of capitalized value. This change of name, signifying the creation of a new identity, seems appropriate at the moment.
Per the company, the new name was inspired by the Latin root meaning strength, courage and signifying something of value. According to the offshore contract drilling services supplier, the new name signifies its intention to be the industry leader. (Read more EnscoRowan to be Renamed Valaris Effective Jul 31)
5. Equinor ASA EQNR recently announced that the company will sell a 16% interest in Lundin Petroleum AB for a total consideration of around $1.56 billion. As part of the capitalization deal, Equinor will receive a 2.6% stake in the company-operated Johan Sverdrup field and $650 million in cash. The Johan Sverdrup field stake is valued at $910 million.
The company more than doubled its investment value in Lundin since 2016, when it invested 121 Swedish krona per share. Now, Equinor intends to divest around 54.5 million shares for 266.4 Swedish krona ($28.12), a 9.6% discount on Lundin’s closing price on Jul 5. Norwegian investment bank, Sparebank1 Markets will acquire Lundin’s shares to be divested.
Norwegian energy major Equinor will retain a 4.9% stake in Lundin. Through this deal, it plans to capitalize on value creation and boost direct ownership in the Johan Sverdrup field. The deal is expected to increase Equinor’s stake in the Johan Sverdrup oilfield, wherein production is scheduled to start this November, to 42.6%. Amplifying its stake in the oilfield is expected to enable the company to create more value for investors.(Read more Equinor Divests Lundin Interest, Adds Johan Sverdrup Stake)
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
Reflecting the bearish market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – edged down 1% last week. The worst performer was downstream operator Valero Energy VLO whose stock slumped 4.4%.
But longer-term, over six months, the sector tracker is up 1.6%. Integrated energy major Chevron CVX was the major gainer during this period, experiencing a 9.1% 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 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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Valero Energy Corporation (VLO) : Free Stock Analysis Report
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