It was a week where oil settled with a big loss while natural gas finished higher.
On the news front, American supermajor ExxonMobil XOM pared its capital spending budget for this year as the largest U.S. energy firm contends with depleted commodity prices. Meanwhile, Norwegian integrated behemoth Equinor EQNR made a hydrocarbon discovery in the Monument exploration well located in the U.S. Gulf of Mexico.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures slumped 19.7% to close at $22.76 per barrel, natural gas prices gained 6.9% in the week to finish at 1.733 per million Btu (MMBtu). In particular, the oil market was back to losing ways after notching its biggest percentage gain ever in the previous week.
Coming back to the holiday-shortened week ended Apr 9, the crude benchmark posted a large percentage drop as concerns about the coronavirus-induced demand destruction outweighed reports of a historic OPEC+ deal to curb production. Further, the U.S. Energy Department's latest inventory release revealing sharp increases in oil and gasoline stockpiles also had a negative effect on the commodity.
Meanwhile, natural gas ended slightly higher on prospects of lower volumes. The fuel gained on expectations of a cut in shale oil production that will also limit associated gas output, thereby reducing the massive supply glut. However, the narrative remains bearish as natural gas faces the prospect of a coronavirus-related steep drop-off in usage. The commodity is already weighed down by mild winter weather (leading to pessimistic heating demand) amid strong production. In fact, natural gas recently slumped to its lowest price since 1995.
Recap of the Week’s Most Important Stories
1. ExxonMobil recently announced that it plans to slash 2020 capital spending plan by 30% or $10 billion from its original guidance to $23 billion, as low commodity prices amid an oversupplied industry are a concern for the global energy space. The coronavirus pandemic has destroyed a huge chunk of energy demand in the global market. The latest guidance indicates a significant decrease from last year's capital spending of $31.1 billion. Notably, the overall capital budget marks the company’s lowest in the past four years.
Although it did not provide details of its budget cut, Permian is expected to witness the largest share of capital spending cut, as short-cycle investments in the basin can be easily changed according to the market movements.
Upstream profits are expected to decline $1.3-$1.6 billion in the first quarter from fourth-quarter 2019 due to fall in liquids prices. It will likely bear an additional $100-$300 million brunt due to declining gas prices. (ExxonMobil 2020 Capex to be Cut by 30%, Q1 Profits to Fall)
2. Equinor recently announced that the company has found oil in the Monument exploration well, located in the central U.S. Gulf of Mexico (GoM). This is the company’s first operated exploration well in the region in the last five years.
While Equinor holds a 50% operating stake in the prospect, Petronas’ subsidiary Progress Resources and Spanish energy giant Repsol, S.A. have 30% and 20% interests, respectively. Notably, this marks the first discovery of Petronas in the GoM region as well.
The exploration well was drilled with the help of the Pacific Khamsin rig at a water depth of 10,164 meters. It encountered around 60 meters of net oil pay, which provides early indications of the productive reservoir, belonging to the Paleogene sandstone. The company plans further appraisal drillings at the site to gauge the full potential of the finding. (Equinor Makes Oil Discovery in U.S. Gulf of Mexico)
3. Petrobras PBR has made an oil discovery at the pioneer well in Uirapuru block, offshore pre-salt Santos Basin. The well at the Araucária exploratory prospect was drilled 1,995 meter deep underwater, 200 kilometer offshore the city of Santos, unearthing oil in porous reservoirs.
In an earlier release, this Brazilian energy player, carrying a Zacks Rank #3 (Hold), issued an update on the output reduction related to its prior-announced operational rejig. The Rio de Janeiro-based company further lowered its production guidance for 2020. Management stated that this year, production will come down by 200,000 barrels per day. The volume contraction will double the earlier-estimated production cut.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company is further planning to defer payment of salaries of the managerial staff by 10% and 30% and is also condensing working hours for 21,000 personnel by two hours a day. Among other measures to reflect the company’s fiscal responsibility when crude prices are depressed, management confirmed that it would postpone its already-approved dividend. The deferred dividends to shareholders total R$1.7 billion. (Petrobras Discovers Oil, Raises Output Cut, Delays Dividend)
4. Continental Resources CLR has decided to curb production volumes and suspend dividend payouts in the wake of weak global energy demand owing to the coronavirus pandemic.
The upstream energy firm has estimated that the global demand for crude oil and products will get affected by 30%, thanks to the unfavorable business scenario. Henceforth, the company has decided to lower production volumes for the month of April and May by 30%.
Until further notice, the oil producer also got affiliation from the board of directors to suspend quarterly dividend payments. Thus, the company will maximize its cashflows during the pandemic when fuel demand has fallen drastically and oil prices have plunged. Continental added that its prime intention is to minimize costs, maximize cashflows and strengthen financials. (Continental Agrees to Suspend Dividend Due to Coronavirus)
5. HollyFrontier Corporation HFC plans to trim its 2020 capital spending guidance by nearly 15% from its prior expectation of $623-$729 million to the $525-$625 million range after taking into consideration the ongoing decline in commodity prices.
This Dallas, TX-based company's Lubricants and Specialty Products segment is dismissing 2020 outlook for Rack Forward due to deteriorating global market demand. Further, HollyFrontier’s Refining unit limited its running capacity at 70%.
HollyFrontier also recommended restricting the strength of onsite workers to just essential operational employees.The company is prudently scrutinizing its operational and project activities mainly at the refinery and intends to regulate or suspend some minor projects. It will also avoid okaying new projects due to low oil price environment. (HollyFrontier Cuts 2020 Capex View to Survive Oil Price Rout)
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 +10% -38%
CVX +12.2% -27.4%
COP +5.5% -38.5%
OXY +18.2% -62.7%
SLB +15.3% -49.3%
RIG +33.3% -74%
VLO +24.2% -43.1%
MPC +27.8% -59.6%
The Energy Select Sector SPDR – a popular way to track energy companies – jumped 13.7% last week. The best performer was offshore driller Transocean Ltd. RIG whose stock surged 33.3%.
But longer-term, over six months, the sector tracker is down 40.9%. Now on the other end of the spectrum, Transocean was the major loser during this period, experiencing a 74% price plunge.
What’s Next in the Energy World?
In the wake of the landmark OPEC agreement, market participants will now 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 come out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count. Meanwhile, the Q1 reporting season gets underway later this week.
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Click to get this free report Exxon Mobil Corporation (XOM) : Free Stock Analysis Report Transocean Ltd. (RIG) : Free Stock Analysis Report Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report Continental Resources, Inc. (CLR) : Free Stock Analysis Report HollyFrontier Corporation (HFC) : Free Stock Analysis Report Equinor ASA (EQNR) : Free Stock Analysis Report To read this article on Zacks.com click here.