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Oil & Gas Stock Roundup: TOTAL's Oman MOU, Rex Energy's Bankruptcy & More

Nilanjan Choudhury
BancFirst (BANF) delivered earnings and revenue surprises of 7.69% and 1.77%, respectively, for the quarter ended September 2018. Do the numbers hold clues to what lies ahead for the stock?

It was a week where oil prices consolidated above $70-a-barrel and natural gas futures got a lift from growing cooling demand.

On the news front, energy major TOTAL S.A. TOT signed a natural gas resources development deal with the Government of Oman, while U.S. oil and gas provider Rex Energy Corp. REXX confirmed filing for Chapter 11 bankruptcy protection.

Overall, it was another good week for the sector. West Texas Intermediate (WTI) crude futures gained about 0.8% to close at $71.28 per barrel, while natural gas prices rose some 1.5% to $2.847 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Occidental, Cheniere & Petrobras' Earnings Impress)

The U.S. oil benchmark hit a new three-and-a-half-year high last week on bullish EIA inventory numbers, a looming drop in Iranian crude exports and alarming drop in Venezuelan crude output.

The federal government’s EIA report revealed that crude stockpiles registered a fall of 1.4 million barrels, the second weekly decrease in a row. On a further bullish note, the report revealed that refined product inventories, gasoline and distillate, both dropped from their week earlier levels.

The commodity was also supported by U.S. President Donald Trump’s recent withdrawal from a nuclear deal with OPEC’s third-largest producer Iran and a pledge to reimpose sanctions on Tehran. The action has stoked worries about an expected cut in Iranian oil exports by around 1 million barrels per day from current levels and lead to a supply shortage in an already ‘tight’ oil market.

Fast falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has dwindled by almost 50% since 2005. Venezuela currently churns out less than 2 million barrels per day, much lower that its pledge per the OPEC-led supply cuts.

Natural gas prices also moved northward last week. While the weekly inventory release showed a larger-than-expected increase in natural gas supplies, the report pointed to a tightening market dynamic and boosted the fuel’s price. In particular, total consumption of natural gas averaged around 57.5 Bcf per day, 4% higher on a weekly basis due to rising usage for power generation.

Recap of the Week’s Most Important Stories

1.    TOTAL S.A. recently signed a Memorandum of Understanding (MoU) with the Government of Oman to develop natural gas resources in Oman. The agreement covers both the upstream and downstream businesses of the company. TOTAL’s involvement in the above project will increase its production from Oman, which was 37,000 barrels of oil equivalent per day (Boe/d) in 2017.

TOTAL, along with Royal Dutch Shell plc RDS.A, will develop several natural gas discoveries located in the Greater Barik area on onshore Block 6. Shell will be the operator with 75% stake and TOTAL will have 25% interest in these natural gas discoveries. Initial gas production will be 500 million cubic feet per day, with the potential to increase to 1 billion cubic feet.

TOTAL has plans to utilize its equity gas entitlement from the Oman project as feedstock to develop a regional hub for Liquefied Natural Gas (LNG) bunkering service to supply LNG as a fuel to marine vessels. A small-scale liquefaction plant will be built in Sohar port and TOTAL will utilize this plant to convert natural gas to LNG. In addition, TOTAL may benefit from improving natural gas demand in Oman. (Read more TOTAL Signs Agreement to Expand Operation in Oman)

2.    Rex Energy Corporation, which has been facing trying times of late, recently filed for Chapter 11 bankruptcy protection. Hit by the industry downturn, the Zacks Rank #2 (Buy) company had been contemplating Chapter 11 filing for quite some time. Amid elevated leverage metrics, challenges in refinancing its 2020 debt maturities along with weak natural prices creating further pressure, the company is headed toward debt restructuring. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In fact, it has reached a restructuring support deal with 100% of its first-lien lenders and 72% of second-lien bondholders. U.S. oil and gas provider, Rex Energy believes that comprehensive debt restructuring will enable it to overcome the challenging times that the company has been facing. Rex Energy has secured $100 million in financing from first-lien lenders, which along with its operating cash flow would be sufficient for the company to maintain normal operations during bankruptcy proceedings.

Notably, the Appalachian Basin-focused company had got delisted from the Nasdaq stock market effective Apr 12. In its latest quarterly report, the company disclosed that it could not come into an agreement with the lenders, after it failed to make an interest payment in April. Apart from defaulting on the interest payment on its senior notes, Rex Energy also failed to supply timely financial statements and other important disclosures to its lenders. (Read more Rex Energy Files for Bankruptcy Amid Debt Struggles)

3.    Valero Energy Corporation VLO recently signed a long-term contract through its subsidiary, Valero Marketing and Supply de Mexico, S.A. de C.V. for providing refined products like diesel and gasoline to northern Mexico.

Valero is expected to ship fuels from its refineries located in the Corpus Christi and Three Rivers in Texas to Mexico. The company is likely to use NuStar Energy L.P.’s NS infrastructure, which includes the midstream company's Nuevo Laredo storage terminal in Mexico and its related pipelines. The terminal has five storage tanks that hold 34,000 barrels of refined products, which is likely to be increased to meet Valero's requirement. By 2018-end, Valero is expected to start shipping fuel to the storage terminal.

The deal is in line with Valero's strategy of expanding its supply chain in a growing market. Notably, the company has an existing deal made in August 2017, to supply fuels in central Mexico. We note that SENER, Mexico’s Ministry of Energy, had issued renewable permits to Valero for importing almost 54 million barrels of gasoline along with more than 56.7 million barrels of diesel per annum. Notably, the latest accord comes right after the company signed a contract to foray into the South American infrastructure market through the acquisition of Pure Biofuels del Peru S.A.C.(Read more Valero Expands Into Northern Mexico Refined Product Market)

4.    Apache Corporation APA recently inked an agreement to build a new natural gas liquids (NGL) project, in a bid to advance the infrastructural development in its Alpine High play in the Permian Basin. The project, titled SCM Alpine, LLC, will be developed by Apache’s subsidiary Apache Midstream, ARM Energy Holdings LLC and its affiliate Salt Creek Midstream LLC. Notably, Salt Creek is a joint venture formed last month by Ares Management and ARM Energy to develop midstream infrastructure in the Delaware Basin.

The firms intend to build a NGL header system with a takeaway capacity of 445,000 barrels per day for catering to the growing production in the Delaware sub-basin of the Permian play. The project will include two pipeline segments, originating at the Salt Creek and Apache processing facilities in Reeves County, Texas. SCM Alpine is supported by 10-year commitments from both Salt Creek and Apache, which are open to renewal twice for an additional five years. With the construction work already been commenced, the project is likely to become functional in the first quarter of 2019.

The pipeline will transport NGLs to the Waha Hub, where it would interconnect with the downstream pipelines, providing access to Mont Belvieu and Corpus Christi fractionation facilities in Texas. By gaining access to the emerging Waha area, Apache’s long-term opportunities and optionality will be enhanced, providing it a competitive edge. (Read more Apache Inks Deal to Enrich Alpine High Midstream Prowess)

5.    Kinder Morgan, Inc. KMI is going through a roller coaster ride with its Trans Mountain expansion project in Canada, where political uncertainty is playing a major role in deciding its future. Recently, the company received assurance from the Canadian government that losses related to politically-triggered delays in the project will be covered.

As the future of the project seemed in jeopardy, the company started to rethink over the matter. Kinder Morgan was thinking of walking away from the project if further delays would hamper the company’s plans. The recent bottleneck in Canada’s pipelines has forced the government to take steps in this expansion project. The New Democratic Party led government of British Columbia, however, criticized the decision. The party has support from the Green Party, an environment-focused federal political party in Canada.

Canadian Finance Minister, Bill Morneau stated that if Kinder Morgan leaves the Trans Mountain project, the government will be ready to provide the financial assurances as and when any company steps in to take over. (Read more Kinder Morgan Gets Financial Assurance from Canada)

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

0.0%

+1.5%

CVX

-0.7%

+11.6%

COP

+0.2%

+40.7%

OXY

+0.5%

+25.7%

SLB

+4.5%

+21.2%

RIG

+4.7%

+34.3%

VLO

+5.9%

+48.2%

ANDV

+3.2%

+38.6%

Reflecting the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +1.8% return last week. The best performer was independent refiner Valero Energywhose stock jumped 5.9%.

Longer-term, over six months, the sector tracker is up 16.6%. Once again, Valero Energyis far and away the major gainer during this period, experiencing a 48.2% price appreciation.

What’s Next in the Energy World?

With the 2018 Q1 earnings season over, market participants will get back to 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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Nustar Energy L.P. (NS) : Free Stock Analysis Report
 
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