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Oil & Gas Stock Roundup: Shell's Permian Exit, APA's Dividend Hike & More

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·7 min read
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  • NG=F
  • CL=F
  • COP
  • RDS-B
  • PBR-A
  • PXD
  • LPI

It was a week when oil prices moved closer to $75 and natural gas futures reclaimed the key $5 mark.

On the news front, energy biggie Royal Dutch Shell (RDS.A) sold its Permian Basin operations to U.S.-based ConocoPhillips COP for $9.5 billion, while upstream player APA Corporation APA said that it planned to increase its quarterly payout by 150%.

Overall, it was another good week for the sector. West Texas Intermediate (WTI) crude futures gained 3% to close at $73.98 per barrel and natural gas prices inched up 0.7% to reach $5.14 per million British thermal units (MMBtu). Overall, both commodities managed to maintain their forward momentum from the previous four weeks.

Coming back to the week ended Sep 24, oil prices rose, underpinned by a report from the Energy Information Administration ("EIA") that showed draws in crude and distillate stockpiles due to stronger consumption. Crude supplies are now at their lowest levels since October 2018, with U.S. commercial stockpiles down some 18% since mid-March.

Natural gas climbed too, buoyed by the slow restoration of hurricane-affected operations, the anticipated pre-winter supply crunch and surging consumption in Europe and Asia.

Recap of the Week’s Most-Important Stories

1.  Royal Dutch Shell recently announced an agreement to sell all its assets in the Permian, the most prolific basin in the United States, to U.S. upstream major ConocoPhillips. The cash transaction is valued at $9.5 billion.

This deal with ConocoPhillips unlocks a significant value for Shell after examining numerous strategies and portfolio choices for its Permian assets. Upon closure, proceeds worth $7 billion from the transaction will be utilized by the Zacks Rank #2 (Buy) European supermajor to support additional shareholder dividends with the balance going toward debt reduction.

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

For ConocoPhillips, the transaction is highly accretive and involves the acquisition of roughly 225,000 net acres in the heart of the core Delaware basin, a sub-basin of the broader Permian. The accord also includes the buyout of operated crude, gas and water pipelines and infrastructure, covering a vast area of approximately 600 miles. (Here's Why Shell Bids Goodbye to Permian Basin)

2.   APA Corporation recently got approval from the board of directors to increase the quarterly dividend by 3.75 cents to 6.25 cents per share. The new payout will be made on Nov 22 to its common shareholders of record on Oct 22.

APA management sees the dividend hike as the beginning of its path to return ‘a higher percentage of cash flow’ to its investors. This comes after the upstream operator opportunistically brought back its debt to improve its financial position. In August, APA repurchased $1.7 billion in debt via an upsized tender offer, which allowed the company to reduce its annual interest expense by 20%, or approximately $78 million — more than enough to take care of its dividend obligation of $57 million.

APA’s major assets with significant cash flow potential sets it up well for the long-term sustainability of the energy explorer’s free cash flow generating capacity and future increases in dividend. (Is the Dividend Hike Enough to Help APA Turn Attractive?)

Pioneer Natural Resources Company PXD recently agreed to divest some assets in Texas to Laredo Petroleum LPI. The deal is likely to fetch the Permian operator $230 million.

The transaction included around 20,000 net acres located in western Glasscock County and is expected to close next month. The divested acres currently produce around 4,400 barrels of oil equivalent per day, of which 59% is crude oil. Pioneer Natural will receive $160 million in cash and 959,691 Laredo common shares from the divestment.

While the deal is expected to boost Laredo’s footprint in the prolific Midland Basin, it is in line with Pioneer Natural’s plan of divesting some of its non-core assets. The company is planning to divest its assets in the Delaware Basin, per Reuters. It is also expecting to generate more than $2 billion from the divestments. (Pioneer Natural Divests Texas Acres to Laredo for $230M)

4.   TC Energy TRP has entered into a 15-year power purchase agreement (PPA) with a subsidiary of the renewable energy firm EDP Renewables SA for 100% of the Sharp Hills Wind Farm's production in Alberta. Subject to usual regulatory approvals and restrictions, the PPA will allow the continuous development, ultimate construction and operation of the wind farm.

Located in the Special Areas municipality near the hamlets of Sedalia and New Bridgen, in the Alberta province, the 297-megawatt (MW) Sharp Hills Wind Farm is estimated to be operational in 2023.

Calgary, Alberta-based TC Energy will get the rights to all environmental characteristics in addition to the power generated by the Sharp Hills Wind Farm. The company is dedicated to developing solutions for a sustainable energy future and its investment in the Sharp Hills Wind Farm helps it achieve its aim of defining and providing substantial advances to the energy sector as a whole. (TC Energy, EDP Ink PPA for 297-MW Wind Farm in Alberta)

5.  Petrobras PBR announced its commitment to achieve net-zero emissions from operations and work with its partners in non-operated areas to help them lower emissions.

With the rise of Environmental, Social and Governance investing and the broad-based transition toward clean energy; a number of oil/gas companies have decided voluntarily to become carbon neutral over the next three decades.

Petrobras' net-zero target revolves around scopes 1 and 2 emissions, which involve greenhouse-gas emissions from its operations and indirect emissions associated with energy purchases from third-party suppliers. The target will be achieved in a period consistent with the Paris Climate accords. (Petrobras Aims to Obtain Net-Zero Emission From Operations)

Price Performance

The following table shows the price movement of some major oil and gas players over the past week and during the last six months.

Company    Last Week    Last 6 Months

XOM                 +4.4%                +2.8%
CVX                  +4%                   -6.4%
COP                 +10.4%             +18.1%
OXY                  +4.3%               +1.2%
SLB                  +2.5%                +2.5%
RIG                   +2.1%                +3%
VLO                  +3.1%                -7.5%
MPC                 +5.1%                +12.5%

The Energy Select Sector SPDR — a popular way to track energy companies — was up 4.5% last week. The best performer was ConocoPhillips whose stock climbed 10.4%.

Over the past six months, the sector tracker has inched up 0.9%. ConocoPhillips was the major gainer during the period too, experiencing an 18.1% price appreciation.

What’s Next in the Energy World?

As the global oil consumption outlook strengthens amid tightening fundamentals, market participants will be closely tracking the regular releases to watch for signs that could further validate the upward momentum. In this context, the U.S. government’s statistics on oil and natural gas — one of the few solid indicators that come out regularly — will be on energy traders' radar. Data on rig count from the oilfield service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is closely followed too. News related to coronavirus vaccine approval/rollout/distribution will be of utmost importance. Finally, investors will be keeping an eye on the health of China’s economy following the Evergrande crisis.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
ConocoPhillips (COP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Petroleo Brasileiro S.A. Petrobras (PBR) : Free Stock Analysis Report
APA Corporation (APA) : Free Stock Analysis Report
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
TC Energy Corporation (TRP) : Free Stock Analysis Report
Laredo Petroleum, Inc. (LPI) : Free Stock Analysis Report
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