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Oil & Gas Stock Roundup: Good News for TransCanada, Enbridge

Nilanjan Choudhury
Bullish Supply Fundamentals to Boost Oil & Gas US E&P; Industry

It was a week where oil prices settled above $60 per barrel for the first time this year, while natural gas futures continued to tumble.

On the news front, Canadian midstream players TransCanada Corporation TRP and Enbridge Inc. ENB received positive news on their ambitious Keystone XL and Line 3 pipeline projects, respectively.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures rose 1.9% to close at $60.14 per barrel, natural gas prices lost 3.3% to $2.662 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Denbury-Penn Virginia Deal is Off, Murphy Sells Malaysian Assets)

The U.S. crude benchmark rallied to the highest in almost five months, underpinned mainly by production cuts from the OPEC-led group of exporters, and drop in supply from Venezuela and Iran. The so-called OPEC+ deal (an alliance of OPEC, Russia and other non-member countries) is withholding output by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran also continue to tighten the commodity’s fundamentals.

Further to this, hefty draws in product inventories (gasoline and distillate) boosted bullish sentiment in the energy market. Data showing drillers in the United States removing oil rigs – an indicator of lower future output in North America – also contributed to the gains.  

However, natural gas prices slipped further on smaller-than-average decrease in supplies and continued strength in production. Also, with the traditional withdrawal season (when supplies fall on heating demand due to cold weather) ending in March, consumption is likely to decline in the near term.

Recap of the Week’s Most Important Stories

1.    Bringing in pleasant news for TransCanada, Donald Trump issued a new presidential permit in an attempt to kick-start the much-delayed Keystone XL project. While the decision was criticized by environmentalists, the industry players have lauded the move of permitting this significant pipeline project amid infrastructural woes in Canada and the United States.

The $8-billion Keystone XL pipeline, with a capacity of 830,000 barrels, was designed by Zacks Rank #2 (Buy) TransCanada to improve oil extraction from Alberta’s oil sands and the Bakken region. The initial phase of the pipeline project was completed in 2011. A proposal was made to add another 1179 miles to the 2100-mile-long pipeline. The proposed extension was strongly opposed by environmentalists and politicians, owing to the risk of emitting greenhouse gases in transporting bitumen and crude to the United States.

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

While Trump’s clearance should have eliminated all the uncertainties associated with the Keystone project, the green-campaigners are still very much against the pipeline’s construction, and have vowed to continue the legal fights and prospects. Although the presidential permit seeks to bring the 10-year environment review to closure, we believe that the project is still likely to face hurdles. (Read more Will TransCanada's Keystone Pipeline See the Light of Day?)

2.    Enbridge has finally received the green signal from the Minnesota Public Utilities Commission (“PUC”) for its proposed C$9-billion Line 3 crude oil pipeline replacement project. The regulatory authority unanimously rejected the pending petitions of reconsideration of the pipeline’s future. One of the petitions was from the state Commerce Department, which had teamed up with tribal and environmental groups to oppose the pipeline’s approvals.

In February, the Minnesota Court of Appeals sent back the case to the regulatory authority for further proceedings. Notably, the approval came a few weeks after Enbridge said that it expected the project to be delayed by one year due to regulatory approval issues. Hence, the recent consent from the PUC is expected to cheer up investors as well as producers, who’ll use the pipeline to ship their products from Canada to the United States.

The aging 1,660-kilometre Line 3, operating since 1968, connects Canadian producers to the U.S. refineries. Currently, the pipeline operates at half of its capacity. Once the replacement project is completed, the pipeline with a 36-inch diameter will operate at its daily approved capacity of 760,000 barrels. (Read more Enbridge's Line 3 Wins Final Approval From Minnesota PUC)

3.    Royal Dutch Shell plc RDS.A recently shipped its first NGL cargo from the Prelude floating liquefied natural gas (FLNG) project in Australia. Notably, the flagship project is a joint venture among Shell, Inpex Corporation, Korea Gas Corporation and Taiwan’s CPC Corporation, with Shell being the chief operator, owning a 67.5% stake in the project.

Prelude will handle the production, liquefaction, storage and transfer of LNG at sea, and processing, exporting and condensation of liquefied petroleum gas. The facility has a production capacity of around 5.3 million tons per annum (mtpa) of liquids, with LNG accounting for 3.6 mtpa or 68% of the total capacity.

In another development, the energy supermajor, which acquired U.K. power supplier First Utility to lower its carbon footprint, now plans to rebrand the latter as Shell Energy Retail. Additionally, Shell declared that entire electricity supplied by First Utility will now come from renewable sources. This implies powering more than 700,000 U.K. homes with 100% renewable energy. (Read more Shell Ships 1st NGL From Prelude, to Rebrand First Utility)

4.    Noble Energy Corporation NBL announced that it has acquired a 40% interest in Royal Dutch Shell’s two offshore blocks in Colombia. The company will also operate the blocks, per the agreement. The financial details of the transaction are not yet disclosed. Courtesy of this purchase, Noble Energy will operate Caribbean COL-3 and GUA OFF-3 blocks, which cover more than 880,000 hectares.

Although Shell will retain the majority interest in these offshore blocks, Noble Energy has been entrusted with the authority to operate the oil-rich offshore blocks. At present, Noble Energy operates offshore assets in West Africa and Eastern Mediterranean. The company’s existing expertise and knowledge to operate offshore oil and gas assets will definitely help it to manage the offshore South American assets.

Both the companies are expected to invest nearly $100 million for the exploration and development of the offshore Columbian blocks. The exploration of these offshore assets will support Columbia’s goal of increasing its existing reserves to a level that will cover at least 10 years of Columbian oil consumption. (Read more Noble Energy Buys Stake in Shell's Offshore Colombia Assets)

5.    Tullow Oil plc TUWOY, along with its partners in the Orinduik oil and gas field that is located offshore Guyana, recently chose the location for a second well in the field, as part of its 2019 drilling program. The company has approved the drilling budget for the prospect named Joe.

Tullow is the operator of the Orinduik Block and holds 60% stake in it. The company has TOTAL S.A. (TOT - Free Report)       and Eco Atlantic as partners in the block, with 25% and 15% interest, respectively. Eco Atlantic will bear net cost of around $3 million in the Joe prospect for its working interests.

Tullow Oil and its partners in the block expect the two wells to hold a total of 370 million barrels of Gross Prospective Resources. The company has huge plans of operation in the Orinduik Block’s Jethro prospect in second-quarter 2019. It has a Tertiary target of more than 100 million barrels of oil in the block at 1,350 meters of water depth. Total net well cost to the company is expected at around $30 million. The company intends to focus on the Kanuku block’s Carapa prospect in the third quarter. At a net well cost of $20 million, it has a Cretaceous target of more than 200 million barrels of oil at a water depth of 70 meters. (Read more Tullow Oil Finds 2nd Well Site in Orinduik Offshore Guyana)

Price Performance

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

+0.4%

-5.5%

CVX

+0.1%

-0.3%

COP

+1%

-15.6%

OXY

+1.5%

-19.2%

SLB

+2.6%

-29%

RIG

-2.6%

-35.3%

VLO

+0.2%

-29.6%

MPC

-2.4%

-30.6%

In keeping with the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +1% return last week. The best performer was oilfield service biggie Schlumberger SLB whose stock gained 2.6%.

But longer-term, over six months, the sector tracker is down 14.1%. Offshore driller Transocean Ltd. RIG was the major loser during this period, experiencing a 35.3% price decline.

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
 
Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
Transocean Ltd. (RIG) : Free Stock Analysis Report
 
Enbridge Inc (ENB) : Free Stock Analysis Report
 
TransCanada Corporation (TRP) : Free Stock Analysis Report
 
Noble Energy Inc. (NBL) : Free Stock Analysis Report
 
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