It was a week where the price of oil rallied. However, natural gas futures were down slightly.
On the news front, energy biggies Occidental Petroleum Corporation OXY, The Williams Companies, Inc. WMB and Marathon Oil Corporation MRO came up with strong earnings reports.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained about 4.2% to close at $61.68 per barrel, while natural gas prices lost 1% to $2.558 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Earnings Beats & Dividend Hikes from Total, Anadarko & Suncor)
The U.S. oil benchmark recorded its second increase in five weeks. The major catalyst was the Energy Department's inventory release, which revealed that crude stockpiles recorded a lower-than-expected weekly build. A tumbling dollar – that made the greenback-priced crude more affordable for investors holding foreign currency – provided further support.
Meanwhile, natural gas prices dropped last week despite a larger-than-expected decrease in supplies. The decline was primarily on account of strength in the commodity’s production Investors were also spooked by forecasts of warmer weather, leading to the heating fuel’s tepid demand.
Recap of the Week’s Most Important Stories
1. Houston-based energy explorer Occidental Petroleum reported fourth-quarter 2017 earnings of 41 cents per share, beating the Zacks Consensus Estimate by a penny. In the year-ago quarter, the Zacks Rank #1 (Strong Buy) company had posted a loss of 13 cents. The outperformance was owing to improvement in worldwide sales volume and realized price of oil and natural gas liquids. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Occidental Petroleum’s average daily net oil, liquids and gas production volume increased to 621,000 barrels of oil equivalents per day (boe/d) from 583,000 boe/d reported in the year-ago quarter. This increase could be attributed to increased drilling activity and well productivity in the Permian Resources region.
Occidental Petroleum’s proved reserves at the end of 2017 were 2.6 billion barrels of oil equivalent, out of which 60% is located in the United States and the rest in other international locations. Finding and development costs (F&D) were $8.53 per BOE in 2017 compared with $9.65 per BOE in 2016. (Read more Occidental Tops Q4 Earnings Estimates, Issues Guidance)
2. Energy infrastructure provider The Williams Companies reported adjusted earnings from continuing operations of 20 cents per share in line with the Zacks Consensus Estimate. The bottom line improved from the prior-year figure of 17 cents per share. Better year-over-year results can be attributed to absence of impairment charges associated with equity method investments and favorable changes in the income tax provision.
During the reported quarter, Williams Companies’ capital expenditure was $699 million. As of Dec 31, 2017, the company had cash and cash equivalents of 899 million compared with $170 million in the year ago quarter. Long-term debt of the company was $20,434 million, representing a debt-to-capitalization ratio of 67.9%.
The company issued a preliminary guidance for 2018, wherein it anticipates the net income from its major segment Williams Partners to be within the range of $1.5-$1.7 billion range. Williams Companies expects the annual dividend growth rate of 10-15% for 2018 and 2019, with the dividend-coverage ratio of 1.35x.(Read more Williams Companies Q4 Earnings in Line, Sales Top)
3. Upstream energy firm Marathon Oil posted fourth-quarter adjusted income of 7 cents per share, ahead of the Zacks Consensus Estimate of 2 cents. In the year-earlier quarter, the company incurred adjusted loss of 10 cents. The strong numbers came thanks to higher production and the recovery in crude prices. In particular, total quarterly output rose 12% year over year to 383,000 oil-equivalent barrels per day (BOE/d).
The company’s exploration expenses for the quarter came at $57 million, higher than $34 million in the year-earlier quarter. Moreover, Marathon Oil’s total quarterly cost and expenses rose 7.3% to 1,174 million.
During the year, Marathon Oil spent $2,100 million on capital programs, in line with its guidance. The company announced a 2018 capital program of $2,300 million, with 90% of the outlay earmarked for high return U.S. resource plays.
Marathon Oil expects first-quarter 2018 United States E&P output available for sale in the range of 265,000–275,000 BOE/d and International E&P output in the range of 105,000–115,000 BOE/d. For the full year, Marathon Oil forecasts sale-ready output from the combined United States and International E&P segments to average 390,000 to 410,000 net BOE/d. (Read more: Marathon Q4 Earnings Beat on Oil Price, Production)
4. British energy giant BP plc BP has recently commenced production of oil and natural gas from the Atoll Phase One development, located off the coast of Egypt. The prime reservoir of the project – discovered in March 2015 – holds approximately 1.5 trillion cubic feet of natural gas.
BP was able to start production from the Atoll field seven months before it was planned. Moreover, the company was successful in reducing the operating cost of the upstream project by 33% from its initial projection. BP’s daily oil and natural gas production from the field currently stands at 10,000 barrels and 350 million cubic feet, respectively.
Investors should know that Atoll Phase One project is the first key upstream development of BP, having initiated operations in 2018. During 2016 and 2017, BP managed to bring 13 key developments online, which already boosted the company’s daily production by more than 500,000 barrels of oil equivalent (BoE). The firm believes that all these major projects might help reach its target worth 900,000 BoE of daily new output by 2021. (Read more BP Commences Oil & Natural Gas Production From Atoll Field)
5. Energy giant ExxonMobil Corp. XOM recently agreed to divest its 50% stake in the Scarborough gas field offshore Western Australia to Woodside Petroleum Ltd for $744 million. The gas field is located in the Carnarvon Basin.
The divestment can shrink ExxonMobil's risky asset portfolio and give an opportunity to focus on comparatively cheaper offshore liquefied natural gas (“LNG”) prospects in Papua New Guinea, Mozambique and others.
Moreover, the company was of the opinion that the economic development of the gas field involved a few challenges like water depth, resource characteristics and execution complexities. With production unlikely to start before 2025, short-run payoff from the field is not available.
Additionally, offshore drilling is excessively expensive that might dent the company’s cash flow. The Scarborough project’s overall estimated cost was $9.7 billion. ExxonMobil’s move is likely to enable the company to improve its cash flow situation. (Read more ExxonMobil to Sell Scarborough Field Interests to Woodside)
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 positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.1% return last week. The best performer was independent refiner Valero Energy Corp. VLO, whose stock soared 7.5%.
Longer-term, over 6 months, the sector tracker is up 8.7%. Valero Energy was again the major gainer during this period, experiencing a 41.4% price appreciation.
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.
However, the 2017 Q4 earnings again remain the primary focus this week, with a number of S&P 500 members coming out with quarterly results.
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