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Oil & Gas Stock Roundup: Schlumberger & Halliburton's Q1, ConocoPhillips' Asset Sale

Nilanjan Choudhury
Investors need to pay close attention to Anadarko Petroleum (APC) stock based on the movements in the options market lately.

It was a week where oil prices were near flat but natural gas futures tumbled to the lowest in almost three years.

On the news front, oilfield service majors Schlumberger SLB and Halliburton HAL reported in-line earnings. While the North America business environment remains challenging, both the companies expect further uptick in international drilling activity, confirming the region’s broad-based recovery. Meanwhile, upstream biggie ConocoPhillips COP agreed to sell its North Sea assets for $2.7 billion.  

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures held almost unchanged to close at $64 per barrel, natural gas prices fell 6.4% for the week to finish at $2.49 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Chevron's $50B Anadarko Buy, Shell's Asset Sale & More)

The U.S. crude benchmark was little changed even as the Energy Department's latest inventory release showed that stockpiles recorded a surprise weekly draw - the first in a month. The government data also revealed that both gasoline and distillate inventories declined but the magnitude was less than expected.

Nevertheless, oil has climbed more than 40% this year, 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.

Meanwhile, natural gas prices plunged to their lowest since June 2016 as a result of record levels of production. While the fundamentals of natural gas consumption continue to be favorable, record high production in the United States and expectations for explosive growth through 2020 means that supply will keep pace with demand.

Recap of the Week’s Most Important Stories

1.    The world’s largest oilfield services provider, Schlumberger, reported first-quarter 2019 earnings of 30 cents per share (excluding charges and credits) -- in line with the Zacks Consensus Estimate,courtesy of contributions from Integrated Drilling Services (‘IDS’) projects in Saudi Arabia, India and Mexico. The bottom line, however, declined from 38 cents a year ago owing to lower contributions from directional drilling in the land market of North America. Decline in OneStim revenues from the continent’s land regions added to the concerns.

Schlumberger added that explorers and producers are constrained by the reduction in capacity for borrowings and increase in cost of capital. Also, the explorers are facing constant pressure from investors for higher returns instead of production growth. The headwinds are likely to lower investments by explorers and producers in the land market of North America by 10% through 2019, added the world’s largest oilfield service firm.

The company is, however, expecting an improvement in the international markets where the count of drilling rigs is rising and final investment decisions (FID) for clients’ projects are on the rise. The tailwinds are supporting Schlumberger’s projection of 7 to 8% surge in spending by upstream energy firms through 2019 in international markets. (Read more Schlumberger Q1 Earnings Meet, Revenues Beat Estimates)

2.    Smaller rival Halliburton reported in-line first quarter profit on robust international activity, offsetting pricing pressure in the North American business. The oil service bellwether saw its adjusted net income (excluding impairments and other charges) come in at 23 cents per share, same as the Zacks Consensus Estimate.

The world’s biggest provider of hydraulic fracking noted that North American activity levels in the first quarter improved slightly year over year but encountered pricing pressure throughout the period. Importantly, Halliburton suggested that the worst is over for the domestic market, as far as pricing weakness is concerned.

Meanwhile, Halliburton is witnessing broad-based, steady recovery in its international business. The company anticipates its international revenue to grow at a high single-digit rate in 2019, with further improvement next year. In response to the changing market dynamics, the company is looking to continue its disciplined approach to capital spending, improve efficiency, develop sophisticated technologies and generate strong cash flow from operations. (Read more Halliburton Q1 Earnings Meet Estimates, Revenues Beat)

3.    ConocoPhillips recently announced its decision to exit exploration and production of oil and natural gas in the North Sea. In line with the plans, the Zacks Rank #2 (Buy) company has signed a deal with Chrysaor E&P Ltd to divest two ConocoPhillips United Kingdom affiliates for a total consideration of $2.7 billion.

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

The agreement to divest North Sea properties to the private-equity-backed oil firm marks the largest deal of this year so far, with respect to oil and natural gas exploration and production businesses outside America.

Following the divestment of interests in the oil fields of the U.K. North Sea, ConocoPhillips will be streamlining its operations. In fact, the leading upstream energy player is planning to allocate capital to resources where cost of operations will be considerably lower, making operations more efficient. (Read more ConocoPhillips Agrees to Divest North Sea Resources for $2.7B)

4.    Kinder Morgan Inc. KMI posted first-quarter 2019 adjusted earnings of 25 cents per share, in line with the Zacks Consensus Estimate and up almost 14% from the year-ago quarter’s 22 cents.

Higher transported natural gas volumes along with liquids business strength primarily supported first-quarter 2019 results. This was negated partially by Kinder Morgan Crude & Condensate pipeline’s lower contributions. Although the company announced strong first-quarter earnings along with dividend hikes, investors were disappointed with the midstream energy firm’s projection for below-budget 2019 EBITDA.

Kinder Morgan received an approval from its board of directors to increase quarterly dividend. The dividend for the March quarter of 2019 came at 25 cents per share, representing a sequential hike of 25%. The increased dividend is likely to be paid on May 15, to stockholders of record as of Apr 30. (Read more Kinder Morgan Posts In-Line Q1 Earnings, Hikes Dividend)

5.    McDermott International, Inc. MDR jumped 12.6% after it announced positive news regarding the Cameron LNG project, located in Hackberry, LA. The company, along with Chiyoda International Corporation — its joint venture (JV) partner in the project — reported that the liquefied natural gas (LNG) project’s Train 1 has reached the final commissioning stage, marking a significant milestone.

The recent development bodes well for the company. Notably, McDermott had been suffering for a long time due to the Cameron LNG project’s cost overruns. In the fourth quarter, the company incurred $168-million charge in overruns from the project. In third-quarter and second-quarter 2018, the company incurred additional costs of $482 million and $165 million, respectively, for the project. Unfavorable labor productivity, and rising subcontracts, commissioning and construction management costs were the reasons behind these changes in estimates.

In 2014, the JV was awarded the contract, valued at around $6 billion, to construct the Cameron LNG Project. McDermott’s scope of work on the project incorporated engineering, procurement and construction activities for the addition of liquefaction and export facilities. The recent development in the project includes the introduction of pipeline feed gas into the Train 1 of the export facility. (Read more McDermott Up 12.6% as Cameron LNG Project Nears Completion)

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

+0.3%

+3.8%

CVX

0%

+7.5%

COP

-2.2%

-3.3%

OXY

-5.4%

-10.7%

SLB

-0.2%

-16.8%

RIG

+0.2%

-15.8%

VLO

-0.4%

-0.6%

MPC

-2.9%

-15.2%

The Energy Select Sector SPDR – a popular way to track energy companies – edged down 0.5% last week. The worst performer was Houston-based energy firm Occidental Petroleum OXY whose stock slumped 5.4%.

But longer-term, over six months, the sector tracker is virtually unchanged.

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 2019 Q1 earnings, with a number of S&P 500 members plus few supermajors coming out with quarterly results.

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McDermott International, Inc. (MDR) : Free Stock Analysis Report
 
Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Kinder Morgan, Inc. (KMI) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
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