It was a week where oil prices went back to their losing streak on persistent oversupply fears, while natural gas futures breached the $3 barrier on bullish weather update.
On the news front, energy infrastructure developer TransCanada Corp. TRP received a presidential permit from the Trump administration to build the controversial Keystone XL pipeline, while supermajor Chevron Corp. CVX confirmed the sale of its South African unit for $900 million.
Overall, it was another mixed week for the sector. While West Texas Intermediate (WTI) crude futures lost 1.7% to close at $47.97 per barrel, natural gas prices rose 3.4% to $3.076 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Transocean's Jack-Up Deal, BP's Pipeline Sale Talks and More.)
Suffering its third loss in a month, oil prices were pressured by the U.S. government data that showed supplies – building since the beginning of the year – rose to record levels amid an increase in production.
At over 530 million barrels, current crude supplies are up 6% from the year-ago period and are at the highest level since the EIA began keeping records in 1982. Moreover, domestic output has steadily risen to more than 9 million barrels per day, the most since February 2016.
The ballooning U.S. oil production and supplies are starting to undermine the OPEC members’ surprisingly high level of compliance with the landmark production cut agreement signed late last year.
The commodity was also weighed down by data from Baker Hughes indicating another rise in the domestic oil rig count and pointing to the resurgence in shale drilling activities.
Oils-Energy Sector 5YR % Return
Oils-Energy Sector 5YR % Return
Meanwhile, natural gas climbed above the $3 threshold as predictions of strong demand on the back of a late-winter cold blast more than offset the smaller-than-expected decrease in weekly supplies.
Recap of the Week’s Most Important Stories
1. Calgary-based midstream company TransCanada Corp.’sKeystone XL pipeline has finally received permission from the Trump administration to continue construction work. TransCanada currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
With consent from the President, the $8 billion pipeline project is now closer to completion. We remind investors that the 1,700-mile pipeline, which stretches from Canada to the Texas Gulf Coast, has been a burning issue for environmental groups as well as energy industry advocates.
The proposed pipeline would carry oil from tar sands in Alberta, Canada, to refineries along the Texas Gulf Coast. It will pass through Montana, South Dakota, Nebraska, Kansas and Oklahoma. It would transfer about 800,000 barrels of oil per day.
Even with the Trump administration's new permit, the pipeline faces route challenges and opposition from landowners, environmental groups and Native American tribes. (Read more: TransCanada's Keystone XL Projects Receives Nod from Trump.)
2. California-based integrated energy company Chevron Corp. is set to divest its stake in its South Africa business to Asia’s largest oil refiner, China Petroleum & Chemical Corp., or Sinopec for $900 million. With the deal, Sinopec will secure its first major refinery in the continent, keeping in line with its aim to expand in international markets.
Per the transaction, Sinopec will acquire 75% controlling stake in Chevron’s South Africa and Botswana assets including a 100,000 barrel per day oil refinery in Cape Town, a lubricants plant in Durban and a network of around 820 gas stations. The remaining 25% interest will be owned by local shareholders.
The deal is well aligned with Chevron’s $15 billion divestment program announced in 2014 as the company is focusing on balancing its global portfolio with its long-term business priorities. It will help Chevron to slash costs and streamline its business models amid plunging oil prices. (Read more: Chevron to Sell South Africa Assets to Sinopec for $900M.)
3. TX-based upstream energy firm Marathon Oil Corp. MRO is all set to acquire 21,000 net acres from Black Mountain Oil & Gas and other private sellers in the lucrative Permian Basin. The deal is valued at $700 million and is expected to close in the second quarter of 2017.
This is the company’s second deal in this region in less than two weeks. Earlier, this month, the company had divested the Canadian oil assets and bought 70,000 net acres in the Permian Basin for $1.1 billion.
The current deal will allow Marathon Oil to expand its footprint in the oil-rich shale play to more than 90,000 net acres. The company anticipates a production rate of 400 barrels of oil equivalent per day. The transaction will likely help the company to generate substantial cash flows.
Energy firms like Parsley Energy Inc. ExxonMobil Corp. and Chevron Corp. have been buying land on the booming Permian Basin lately at eye-popping prices. This is due to the region’s extensive pipeline network and abundant labor and supplies which will enable the companies to gain greater margins at the current crude prices. (Read more: Marathon Inks Deal to Expand in the Permian Basin.)
4. Anglo Dutch oil giant Royal Dutch Shell plc RDS.A is paring its African operations, selling assets worth $587 million to Assala Energy Holdings Ltd., which is backed by the global asset manager Carlyle Group L.P. For Shell, the transaction is part of a $30 billion divestment program for 2016--2018.
Per the deal, Shell will offload its onshore oil and gas operations and associated infrastructure in Gabon, Africa. The assets include five operated fields, interests in four non-operated fields, a pipeline system and an export terminal. Shell’s trading units will retain the rights to take oil for the next five years.
The deal takes the $30 billion divestment plans of Shell past the two-thirds mark. The company had sold assets worth $5 billion last year. This year the company has divested more than $15 billion worth of assets including the sale of Gabon properties. (Read more: Shell to Divest Gabon Oil Assets for $587 Million.)
5. Oilfield services giants Weatherford International plc WFT and Schlumberger Ltd. SLB announced that they have inked an agreement to form a joint venture (JV) – OneStimSM – to provide completions products and services for the growth of unconventional resource plays in the United States and Canada land markets.
The joint venture is expected to offer one of the largest multistage completions portfolios in the market as well as one of the leading hydraulic fracturing fleet in the industry.
Schlumberger and Weatherford will hold stakes of 70% and 30%, respectively, in the JV. Subject to regulatory approvals and other customary closing conditions, the transaction is expected to close in the second half of 2017. Schlumberger will be responsible for managing the joint venture and consolidating it for purposes of financial reporting.
Per the terms of the agreement, Schlumberger and Weatherford will contribute their respective North America land hydraulic fracturing pressure pumping assets, multistage completions and pump-down perforating businesses. Weatherford is also entitled to receive a one-time cash payment of $535 million from Schlumberger.
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
Over the course of last week, ‘The Energy Select Sector SPDR’ fell by 3.55%. Consequently, investors witnessed selling in most market heavyweights. The worst performer was San Antonio, TX-based downstream operator Tesoro Corp. TSO whose stock price lost 6.08%.
Longer-term, over the last 6 months, the sector tracker is down 2.21%. Houston-based energy explorer Occidental Petroleum Corp. was one of the major laggards during this period, experiencing a 12.56% price decline.
What’s Next in the Energy World?
In this week, market participants will be closely tracking the regular releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count.
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