It was a week where oil prices extended the streak of gains but natural gas futures slipped again.
On the news front, U.S. behemoth ExxonMobil Corporation XOM was toppled by Russia’s Gazprom as the world’s top energy company, while smaller rival Chevron Corporation CVX elected Michael Wirth to succeed john Watson as its next Chairman and CEO.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained about 2% to close at $51.67 per barrel, natural gas prices edged down 0.5% to $3.007 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP Project Start-Up, PSXP Asset Buyout, RIG's Floater Retirement.)
The U.S. oil benchmark wrapped up a strong quarter amid a surprise decline in US inventories and an improving supply-demand narrative. But data showing the number of U.S. oil rigs climbing for the first time in four weeks kept gains in check.
The federal government’s Energy Information Administration (‘EIA’) report revealed that crude inventories decreased by 1.85 million barrels for the week ending Sep 22. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go up some 1.3 million barrels.
Meanwhile, energy bodies OPEC and IEA both recently raised global oil demand forecasts for this year. Also, supply from the 14-member OPEC cartel is set to remain constraint for at least the next six months, helping to tighten the market significantly. Adding to the positive momentum, OPEC and Russia claimed to be on the right track in clearing the global oil glut with half the job done.
However, the commodity gave up some of its gains after the number of active rigs drilling for crude in the U.S. – an indicator of oil industry activity – rose by six to 750, as per data from oilfield services firm Baker Hughes Inc.
On the other hand, natural gas futures finished slightly lower despite a smaller-than-expected increase in supplies. Unfavorable weather forecasts and strength in the commodity’s production, induced the minor drop in prices.
Recap of the Week’s Most Important Stories
1. Per the S&P Global Platts ranking of the top financial performers of the year, U.S. oil giant ExxonMobil Corporation was pushed down to the ninth spot from its top position. In fact, only two domestic companies could sustain their position in the Top 10 lists of the biggest financial performers. Valero Energy Corporation, an independent refiner in the United States secured the No.8 position, down from the No. 3 spot held last year. Another U.S. company that had a massive rank fall was Chevron Corporation, down to No.121 from No.17 last year.
Russian energy company Gazprom dethroned ExxonMobil from theNo.1 spot in the 2017 S&P Global Platts Top 250 Global Energy Company Rankings. Last year, Gazprom had secured theNo.3 slot.
An energy economist explains that government support might have been a big factor that has led to the change in the rankings. The Russian government owns majority in Gazprom. Also, Gazprom’s No. 1 spot is significant of management's endeavor to combat low oil and gas prices, bans from low interest rate credit in Europe and its position as the EUs leading foreign supplier of natural gas, a market where the United States is seeking expansion opportunities.
2. U.S. energy giant Chevron Corporation recently announced plans to appoint Michael K. Wirth as the CEO and chairman as the company seeks managerial changes to deal with the volatile dynamics of the oil industry. Wirth, who is currently the vice chairman of the company, will take over as the CEO from Feb 1, 2018. He will be replacing John Watson who has served the company as the CEO for the last eight years.
Persistent weakness and volatility in oil prices pose challenge to the upstream operations of the company as it is not being able to sell crude at viable prices and is unable to generate significant cash flows for shareholders. Chevron being an integrated player, is thus trying to increase its focus on downstream business which can be profitable in the current environment.
In our opinion, Wirth’s appointment is a sound choice, given his substantial knowledge and experience regarding refining and petrochemicals. With the election of Wirth as the CEO, Chevron will follow the footsteps of energy majors like ExxonMobil Corporation, Royal Dutch Shell plc and TOTAL S.A., all of whose CEO’s are refining specialists.
Wirth joined Chevron in 1982 and became the vice chairman earlier this year. He has spent around 10 years as the executive vice president of Chevron's downstream and chemicals business. To exit non-competitive projects, Chevron divested downstream assets in Canada to Parkland as part of Wirth's strategy. It also lowered the company’s operating and capital costs. Apart from providing a leaner business model, it helped Chevron to progress toward its $5-$10 billion divestment goals for 2016-2017. (Read more Can Chevron Flourish With Michael Wirth at the Helm?)
3. Energy explorer Laredo Petroleum, Inc. LPI recently entered into a deal to divest stake in Medallion Gathering & Processing, LLC which is a pipeline unit located in Permian Basin. Laredo holds a 49% stake in the pipeline while the remaining interest is owned by private investment firm The Energy & Minerals Group. Private equity firm Global Infrastructure Partners will acquire the Medallion pipeline for $1.825 million along with additional cash consideration. Subject to satisfactory closing conditions, Zacks Rank #3 (Hold) Laredo will receive $825 million from the transaction. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Laredo made its initial investment in the Medallion-Midland Basin crude oil pipeline system in 2013. The Medallion unit comprises more than 800 miles of pipelines spread over 325,000 net acres. In around four years, the value of the pipeline has increased by $1 billion. The sale proceeds which will be received by Laredo reflect three times the invested capital and equivalent to an IRR of more than 65%.
Laredo will use the sale proceeds to strengthen its balance sheet by reducing its $1.4 billion debt as on July 30. Interest savings arising from debt reduction along with favorable expected market conditions and production growth is likely to make the firm well positioned to become cash flow neutral by the end of 2019. The deal will also provide the firm with enough financial flexibility to focus on core operations and accelerate drilling activities in the Upper and Middle Wolfcamp formations. (Read more Laredo Monetizes Stake in Medallion Pipeline to Cut Debt)
4. Oilfield service provider TechnipFMC plc FTI recently received an Engineering, Procurement, Construction and Installation (“EPCI”) contract from Norway-based integrated oil and gas company Statoil ASA STO for the Peregrino Phase II Project.
The contract is related to the establishment of the subsea pipeline connection for the new production platform in the project. In-field lines will be used to connect the new fixed platform with the existing platform. Apart from the EPCI obligation, TechnipFMC will assume the manufacturing and pre-commissioning works of the rigid and flexible lines and provide required subsea equipment.
The project is located in Campos Basin, offshore Brazil. TechnipFMC has existing operations in Brazil and plans to use its local expertise as well as the global state of the art pipelay fleet for the project. The company previously worked on the surface trees package in this project. The offshore campaign is expected to start in 2019.
5. Domestic energy explorer Cabot Oil & Gas Corporation COG finally settled a lawsuit filed by two families in Dimock, Pennsylvania. Cabot Oil & Gas was accused of contaminating groundwater in the Pennsylvania town.
Cabot Oil & Gas ramped up drilling activities in Pennsylvania’s Marcellus shale in 2008. In 2009, 15 Dimock families moved court against the company claiming that the drilling operations were responsible for polluting drinking water. However, all the residents made an out-of-court settlement except the families of Ely and Hubert.
In March 2016, a jury of 10 issued a ruling holding the company guilty of groundwater contamination. The jury directed the company to pay $2.75 million to Elys and $1.49 million to Huberts. However, in March 2017, the U.S. Magistrate Judge Martin C. Carlson, overruled the jury’s $4.2 million award for the Dimock plaintiffs on account of weakness and irregularities in their testimony and arguments as well as missteps by their attorney. Carlson also turned down Cabot Oil & Gas’s request to pass a judgment in favor of the company and ordered a fresh trial.
However, the oil and gas producer and the Dimock families have finally managed to reach a settlement, though the terms of the settlement remain undisclosed. This brings the decade long controversy to a close. (Read more Cabot Oil & Gas Settles Lawsuit With Dimock Families)
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
The Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.4% return last week. The best performer was offshore drilling rig operator Transocean Ltd. RIG whose stock rose by 18.5%.
Longer-term, over the last 6 months, the sector tracker is down 2.1%. Ironically, it was again Transocean that was the major laggard during this period, experiencing a 17% price decline.
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.
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FMC Technologies, Inc. (FTI) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
Statoil ASA (STO) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Transocean Ltd. (RIG) : Free Stock Analysis Report
Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
Laredo Petroleum, Inc. (LPI) : Free Stock Analysis Report
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