It was a week which saw oil prices hit 1-year peak, while natural gas futures soared to their highest level since Dec 2014.
On the news front, independent oil and gas player RSP Permian Inc. RSPP agreed to acquire private equity-backed producer Silver Hill Energy Partners for $2.4 billion in cash and stock, while supermajor Chevron Corp. CVX is looking to raise around $2 billion by selling its Bangladesh natural gas assets.
Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures added 1.1% to close at $50.35 per barrel, while natural gas prices rallied 2.9% to $3.285 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Transocean's Contract Termination, Marathon Oil's Asset Sale.)
Oil prices notched up their fourth successive weekly gain as investors clung on to optimism generated by OPEC and non-OPEC players’ commitments to slash production targets.
The Organization of Petroleum Exporting Countries (OPEC), whose member nations supply around 40% of the world's crude, said it would cut production by as much as 750,000 barrels a day starting in November in order to keep oil prices from falling further. The group also claims to have firm commitments from non-OPEC biggies like Russia to participate in a collective effort to cut the supply glut.
Apart from the OPEC announcement, oil prices were also supported by the U.S. Energy Department's weekly inventory release, which showed that domestic crude production declined to a level not seen since Jun 2014.
Meanwhile, natural gas raced to a 22-month high following another thinner-than-expected build – the 23rd in a row. The commodity was also buoyed by a government report that lifted price forecast for 2016 and 2017.
Recap of the Week’s Most Important Stories
1. Upstream energy player RSP Permian Inc. announced its decision to acquire Silver Hill Energy Partners. The transaction value has been estimated at roughly $2.4 billion that includes both cash and stocks. The move reflects RSP Permian’s intention to expand its resources in the Permian Basin in Texas. RSP Permian currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Silver Hill Energy has controlling interest in 68,000 gross (41,000 net) acres within the Delaware basin that contributes to about 15,000 net barrels of oil equivalent every day (BOE/D). RSP Permian already operates huge acreages in the Midland Basin that cover almost 63,000 net acres of land. The acquisition will now give the company access to 3,200 gross undeveloped areas in the Delaware. Silver Hill Energy also owns 58 producing wells, of which 49 are horizontal.
The Permian Basin acreage is one of the cheapest for developing U.S. onshore oil fields. Hence, RSP Permian’s decision to acquire more properties in the region is undoubtedly a prudent one. According to media reports, this deal will likely boost production of RSP Permian by almost 50%. (Read more: RSP Permian to Snap Up Silver Hill Energy for $2.4B.)
2. Chevron Corp., the second-largest U.S. oil producer, confirmed that it is contemplating the sale of its natural gas assets in Bangladesh to counter weak commodity prices. The assets that are likely to be sold produce natural gas and condensate from three fields in the northeast of the country.
In Bangladesh, Chevron operates the Bibiyana, Jalalabad and Moulavi Bazar fields. The company sells all the production to state oil company Petrobangla. Its net daily production last year averaged 720 million cubic feet of natural gas and 3,000 barrels of condensate.
As per reports, Chevron is seeking about $2 billion from the potential sale of natural gas assets in Bangladesh. Notably, the proposed sale has drawn interest of several Indian and Chinese oil producers. (Read more: Chevron in Talks to Sell Natural Gas Assets in Bangladesh.)
3. British oil major BP plc BP announced its decision to discontinue exploration drilling program in the Great Australian Bight (“GAB”), offshore South Australia.
The appraisal and evaluation of BP’s upstream strategy in early 2016 led to this move. BP believes that, in the near future the GAB project will not be competitive enough for as much capital investment as other upstream opportunities in its global portfolio.
BP has also discussed this with its joint venture partner Statoil ASA. The latter has displayed a complete understanding of BP’s change in strategic direction and accepted its decision BP was rewarded exploration licenses for four blocks in the Ceduna area of the GAB in Jan 2011. The company acquired seismic data in the area in the period between late 2011 and early 2012. In 2013, Statoil farmed in 30% in the licenses, while BP remained the operator with an interest of 70%. (Read more: BP to Discontinue Drilling Program in Great Australian Bight.)
4. Downstream operator Phillips 66 PSX entered into an agreement with its master limited partnership Phillips 66 Partners L.P. to drop down properties worth $1.3 billion to the latter.
Phillips 66 would give 30 assets that comprise crude pipelines, refined products and natural gas liquids pipelines and terminal systems. The agreement includes units supporting the parent company's refineries in Bayway, New Jersey; Billings, Montana; Borger, Texas and Ponca City, Oklahoma.
This apart, Phillips 66 will enter into a decade long terminaling and throughput agreements that will include minimum volume commitments covering about 85% of expected volumes. On completion of the deal – expected sometime in Oct – the partnership will be entitled to receive cash earnings related to the acquired assets as of Oct 1, 2016. (Read more: Phillips 66 Drops Down Assets Worth $1.3B to Partnership.)
5. Italian energy company Eni SpA E announced that the first batch of export crude oil has been dispatched from the onshore processing plant of the massive Kashagan oil field.
The field was re-opened a little while back, upon successful replacement of pipelines. Production is now estimated to increase up to a first level of 180,000 barrels per day. The consortium for the development of Kashagan aims for a production level of 370,000 barrels per day by the end of 2017.
Located in the North Caspian Sea, the giant oilfield is about 80 kilometers southeast of Atyrau, in Kazakhstan. Kashagan is one of the largest oil fields discovered in the last four decades and is estimated to hold reserves of 35 billion barrels of oil in place. In fact, the oil field is considered to be one of the most complex and challenging industrial projects worldwide in terms of its size, the specifications, as well as the environmental and logistical characteristics involved.
Kashagan is operated by NCOC (North Caspian Operating Company) which operates within the North Caspian Sea Production Sharing Agreement (NCSPSA). Eni has a stake of 16.81% in the project. (Read more: Eni Announces Dispatch of First Crude Cargo from Kashagan.)
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
Notwithstanding the past week’s increase in oil prices, the reaction in energy stocks was negative. As a result, over the course of last week, ‘The Energy Select Sector SPDR’ was down 1.45%. Consequently, investors witnessed selling in most market heavyweights. The worst performer was Houston-based oil and gas finder ConocoPhillips COP whose stock price fell 5.27%.
But longer-term, over the last 6 months, the sector tracker has gained 7.54%. Oilfield services behemoth Schlumberger Ltd. SLB was one of the major beneficiaries during this period, experiencing a 4.56% price increase.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular weekly 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.
The 2016 Q3 earnings will also remain under scrutiny this week, with the oil services companies – providers of technical products and services to drillers of oil and gas wells – kicking off what is expected to be another tough earnings season for U.S. energy firms.
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