It was a week where oil prices tallied a small gain, while natural gas futures fell from their 2-year highs.
On the news front, natural gas pipeline company The Williams Companies Inc. WMB said that it planned to increase its quarterly payout by 50%, while SM Energy Co. SM agreed to sell $800 million in Eagle Ford assets.
Overall, the sector started 2017 on a mixed note. While West Texas Intermediate (WTI) crude futures inched up 0.5% for the week to close at $53.99 per barrel, natural gas prices slumped 12% to $3.285 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: BP's Australia Buy, Exxon's New Gas Find and More.)
Posting its fourth successive weekly gain, oil prices began the year on a positive note. Investors and analysts remain upbeat that producers will adhere to their agreed output cut quotas, which will reduce the global inventory glut next year. A tumbling dollar and sharp fall in U.S. crude stockpiles provided further support. However, a surge in refined product inventories and a burgeoning rig count kept prices in check.
Meanwhile, natural gas turned sharply lower following a lower-than-expected withdrawal. The heating fuel was further pressured by forecasts of warmer weather that translates into weak demand.
Recap of the Week’s Most Important Stories
1. Energy infrastructure provider The Williams Companies Inc. recently raised its quarterly dividend by 50% but has reduced the quarterly dividend of its subsidiary Williams Partners L.P. by 30%. Also, the parent company announced its plans to increase its stake in the subsidiary to 72% and is likely to fund the purchase with equity.
Williams Companies will now pay a quarterly dividend of 30 cents per share as against 20 cents paid earlier, bringing the annual dividend yield to 3.6% from the prior level of 2.5%. Williams Partners, on the other hand, will now pay a quarterly dividend of 60 cents per share compared with 85 cents paid earlier, bringing the annual dividend yield to 7.5% from the prior level of 9.2%. The dividend is payable in Mar 2017 and Williams targets 10–15% annual growth over the next several years.
William Companies is planning to raise its stake in Williams Partners units to 72% from 60%. The company will be issuing 65 million shares of common stock to finance the purchase of some 289 million units of Williams Partners. The price of each unit of Williams Partners will be $36.09 and the entire transaction is estimated to be worth $11.4 billion.
2. Oil and gas finder SM Energy Co. has inked a definitive agreement with Venado Oil and Gas LLC – an affiliate of private equity giant KKR – for the sale of its third-party operated assets in the Eagle Ford, comprising its ownership interest in related midstream assets.
The deal, valued at $800 million, is anticipated to close in first-quarter 2017, with an effective date of Nov 1, 2016. The purchase price will be subject to certain closing price adjustments.
The assets to be divested comprise about 37,500 net acres in the Maverick Basin/Eagle Ford area of south Texas and a 12.5% interest in the Springfield Gathering System.
As of year-end 2015, net proved reserves related with these assets were 65 million barrel of oil equivalent (38% oil, 31% natural gas and 31% NGLs). In third-quarter 2016, these assets produced about 27,260 net BOE per day (33% oil, 33% natural gas and 34% NGLs.). (Read more: SM Energy to Sell Non-Operated Eagle Ford Assets for $800M.)
3. Downstream operator Marathon Petroleum Corp. MPC reported updates on company`s previously announced initiatives in order to enhance shareholder value.
Marathon said it would speed up drop-down of assets with about $1.4 billion of annual earnings before interest, taxes, depreciation and amortization to MPLX L.P. The latter is a master limited partnership formed by Marathon Petroleum to purchase, develop and operate midstream assets. The transaction is expected to take place in 2017.
Additionally, the company announced that a special committee will conduct a review of Speedway-Marathon’s brand of company-owned and operated convenience stores and gas stations. An update on the review is expected by mid-2017.
These steps come post Elliott Management’s proposal in Nov 2016 to part ways with Marathon. Elliott Management, a hedge fund which owns 4% of Marathon Petroleum's shares, suggested so because it wanted the oil company to progress with plans to transfer some operations to MPLX. They also wanted Marathon to consider spinning off or selling the Speedway business. Post these strategic updates by Marathon Petroleum, Elliot Management is happy with the former’s decisions. (Read more: Marathon Petroleum Offers Updates on Strategic Initiatives.)
4. Calgary, Alberta-based oil and gas explorer Encana Corp. ECA announced that it expects to exceed 2017 production and profit margin forecasts discussed on its Investor Day in Oct 2016. Encana currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company reported that it is expecting to register a corporate margin of greater than $10 per barrel of oil equivalent (BOE) in 2017. That's 25% higher than the $8 per barrel margin anticipated earlier. Per the company, this projection is a result of anticipated lower costs through the year and increased total volumes expected in the second half of 2017.
Additionally, Encana expects to record year-over-year production growth from its core four assets of at least 15–20% from the fourth quarter of 2016 to the fourth quarter of 2017.
For 2018, Encana expects to grow its corporate margin to $13 per BOE. Also, it expects to increase production from its core four assets by over 30% from the fourth quarter of 2017 to the fourth quarter of 2018. The company expects to provide more detail on Feb 16, when it issues its fourth-quarter and year-end results. (Read more: Encana Expects to Surpass 2017 Production Projections.)
5. Oil services behemoth Schlumberger Ltd. SLB announced the acquisition of Scotland-based Peak Well Systems, a specialist in the design and development of advanced downhole tools for flow control and well integrity, for an undisclosed sum.
The addition of Peak’s mechanical and remedial solutions for cased-hole well intervention will enhance Schlumberger’s production services portfolio with an extensive offering of mechanical services to its global customers.
Peak’s current portfolio of flow control technologies has made its products leaders in the industry, mainly due to their simplicity, performance and reliability. (Read more: Schlumberger Boosts Portfolio with Peak Well Systems Buyout.)
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 0.82%. The worst performer was refiner Tesoro Corp. TSO whose stock price fell 7.05%.
But longer-term, over the last 6 months, the sector tracker gained 10.24%. Another downstream operator Valero Energy Corp. VLO was one of the major beneficiaries during this period, experiencing a 36.87% price increase.
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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