It was a week where both oil and gas prices ended lower.
On the news front, oilfield service major Halliburton HAL reported fourth-quarter earnings that outperformed the Zacks Consensus Estimate, while Italy’s Eni S.p.A. E was awarded a 20% share in state-owned Abu Dhabi National Oil Company’s (“ADNOC”) refining subsidiary.
Overall, it was a dismal week for the sector. While West Texas Intermediate (WTI) crude futures edged down 0.7% to close at $53.69 per barrel, natural gas prices plunged 8.7% to $3.178 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Schlumberger's Q4, Shell's Acquisition Plans & More)
The U.S. crude benchmark fell for the first time in four weeks on IMF’s lower global growth forecast for 2019 and signs of economic slowdown in China - one of the world's biggest oil user. EIA's inventory release showing a surprise weekly build in crude stockpiles also contributed to the losses.
Meanwhile, natural gas prices registered a steep weekly decline following forecasts of warmer weather in February, which could impact the heating fuel’s demand.
Recap of the Week’s Most Important Stories
1. Oilfield services behemoth Halliburton reported higher-than-expected fourth quarter profit on robust international activity. This more than offset slowdown in the North American completion services demand that led to pricing pressure in the hydraulic fracturing business.
The world’s biggest provider of hydraulic fracking noted that for operators in North America, where oil production has reached record levels, it’s more about the returns and not growth. The volatility in the commodity price has convinced explorers and producers to take a relatively conservative approach on capital expenditure programs. Meanwhile, Halliburton is witnessing steady recovery in its international business.
In response to the changing market dynamics, the company is looking to cut down on spending, develop sophisticated technologies and generate strong cash flow from operations. (Read more International Recovery Drives Halliburton Q4 Earnings)
2. Eni S.p.A. recently inked a Share Purchase Agreement with Abu Dhabi National Oil Company (“ADNOC”) for acquiring 20% stake in its refining business, for a cash price of around $3.3 billion, marking one of the largest-ever refineries-related transactions. Austrian oil and gas producer OMV AG also acquired 15% stake in the business for around $2.5 billion. Following the closing of the transaction, ADNOC will retain the rest of the interest in the refining unit.
ADNOC’s refining business is one of the largest businesses in the world with a refining capacity of 922,000 barrels per day (BPD). ADNOC operates three refineries in Ruwais East, Ruwais West and Abu Dhabi. Notably, the Ruwais complex has the fourth highest refining capacity in the world. The refining assets of ADNOC are strategically placed to supply Asian, African and European markets. The deal, which is expected to close in third-quarter 2019, values the refining business at around $19.3 billion.
The deal is expected to boost Eni’s existing global refining capacity of 548,000 BPD by 35%. It will further reduce Eni’s refining break-even target margin by 50%. The move can also enable the company to gain higher margin and diversify the downstream businesses via entering UAE’s downstream market. Eni already has a presence in UAE’s upstream market. The deal further increases Eni’s footprint in the region. The company has operations in Oman, Bahrain, Lebanon and Iraq.
3. RPC, Inc. RES reported fourth-quarter 2018 earnings of 6 cents per share, which lagged the Zacks Consensus Estimate of 10 cents. The bottom line also declined from the year-ago level of 18 cents. The weak fourth-quarter results stemmed from lower activity levels and pricing, especially in the Zacks Rank #4 (Sell) company’s pressure pumping service business.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Operating profit from the Technical Services segment (the company’s major earner) came in at $19.9 million, lower than the year-ago level of $67 million. The decline was mainly caused by lower activity levels in several of the larger service lines along with lower pricing in the pressure pumping service line.
The unexpected fall in crude prices toward the end of 2018 impacted RPC’s clients, forcing them to be conservative on their drilling and completion plans. Many companies decided to re-evaluate their budget, which brought uncertainty to RPC’s business.
As a result, the company forecasts a cautious stance for 2019. It expects total capital expenditure for the year within $240-$250 million, roughly in line with 2018. (Read more RPC Q4 Earnings & Sales Lag Estimates, Costs Decline)
4. Amid severe pullback in the crude prices, PetroChina Company Ltd. PTR expects a decline in fourth-quarter earnings. This is particularly evident from the fact that the company now expects full-year income to increase in the range of 123-132% versus a massive 177% rise in the first nine months of the year. PetroChina anticipates full-year income to increase between RMB 28,000 million and RMB 30,000 million from 2017’s earnings of RMB 22,793 million.
Notably, the company has scrapped off some assets in 2018 and anticipates net loss related to the disposal of the non-current assets to be higher than the prior year. Even if the write-downs were not accounted for, its full-year earnings would have risen only 149% (lesser than 177% in the trailing nine months). This definitely indicates a sharp fall in the fourth-quarter earnings figure as crude prices are going downhill amid supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds.
While PetroChina’s woes are largely attributed to the falling oil prices, factors like slowing economic growth of China along with U.S.-Sino trade tensions have also added to the worries. Given that the company generates majority of its revenues from China, increasing concerns over economic growth of the country have been affecting PetroChina. (Read more PetroChina Expects 4Q18 Profits to Fall Amid Low Oil Prices)
5. Qatar plans to float a tender for firms looking for a stake in its liquefied natural gas (or LNG) expansion development, per Reuters. Companies with stakes in LNG terminals of the country and several other energy majors are expressing their interest in the expansion projects, the source added.
Qatar Petroleum, a state-run energy firm of the country, will be looking for firms that are willing to allocate capital for building the fourth LNG train. With this, the production capacity of the country’s LNG will likely be raised from the recent mark of 78 million tons per annum (MTPA) to 110 MTPA.
The competition for stakes in the expansion development is expected to intensify since Qatar is among the largest producers and exporters of LNG in the world. Notably, the country is considering expanding its LNG capacities by more than 33% over the next five years.
Reuters added that major energy players like Exxon Mobil Corporation, Royal Dutch Shell plc, TOTAL S.A. and ConocoPhillips, with positions in the country’s LNG businesses, will likely be placing bids for the expansion projects. Companies without any stake, including Chevron Corporation, Equinor ASA and Eni SpA, are reportedly expressing interest as well. (Read more Energy Majors Queuing Up for Stakes in Qatar's LNG Expansion)
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
In line with the week’s bearish oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a -1.4% return last week. The worst performer was downstream operator Marathon Petroleum Corp. MPC whose stock fell 3%.
Longer-term, over six months, the sector tracker is down 19.4%. Oilfield service biggie Schlumberger SLB was the major loser during this period, experiencing a 34.5% 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 and the 2018 Q4 earnings, with quite a few supermajors and S&P 500 members coming out with quarterly results.
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