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Oil & Gas Stock Roundup: BP Launches U.S. Pipeline IPO, Shell Enters Mexican Fuel Market

Zacks

It was a week where oil prices ended barely higher, while natural gas futures tallied a steep loss. Moreover, with most of the refinery activity along the Gulf Coast resuming after the temporary disruption from Hurricane Harvey, gasoline futures slumped.

On the news front, European oil major BP plc BP said it would spin off its U.S. pipeline assets into a master limited partnership and take it public, while regional rival Royal Dutch Shell plc RDS.A announced the opening of its first service station in Mexico as it gets ready to pour $1 billion in the Latin American country over the next decade.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures edged up 0.4% to close at $47.48 per barrel, natural gas prices slumped 5.9% to $2.89 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Gasoline Soars Amid MPC's Drop-Down Deal, NBR's Acquisition.)

Despite a hefty inventory build, oil prices recorded their first gain in six weeks. The U.S. Energy Department's inventory release showed that crude stockpiles increased by 4.6 million barrels as Gulf refinery runs fell to record lows on shutdowns due to tropical storm Harvey.


However, this negative sentiment was more than offset by the steadily rising domestic oil demand amid the resumption of operations by Gulf Coast refineries those were shut down by Hurricane Harvey. Concerns over a potential hit to oil production from Hurricane Irma also cushioned prices.

Meanwhile, natural gas traded down sharply following an above-average increase in supplies. Worries over the fuel’s tepid demand on the back of Hurricane Irma-related power outages further pushed down natural gas prices.

Gasoline Plunges on Receding Shortage Fears

The most widely used petroleum product ended 5.7% lower on the week to $1.648 a gallon after jumping in the past couple of weeks in the aftermath of Tropical Storm Harvey knocking out refining operations in the Houston area. With most of the facilities back online and temporary shortages beginning to ease, prices at the pump are starting to fall.

Recap of the Week’s Most Important Stories

1. A wholly owned indirect subsidiary of oil giant BP plc, BP Midstream Partners LP, has commenced its plan of initial public offering (IPO) of common units, which signify limited partner interests. In this respect, BP Midstream Partners has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission ("SEC"). The news followed after the announcement BP made in July, wherein it appraised the creation and IPO of a master limited partnership (MLP).

BP Midstream Partners’ formation as a separate vehicle that would own, operate, develop and acquire pipelines and other midstream assets will help in the growth of midstream business. The IPO would be in line with BP’s strategy to develop its midstream business and at the same time boost shareholder value. Headquartered in Houston, TX, BP Midstream Partners will have offices in Chicago, IL.

Initially, ownership interests in one onshore crude oil pipeline system and one onshore refined products pipeline system are believed to form assets of BP Midstream Partners. Other properties will include an onshore diluents pipeline asset, which delivers liquids to or from the energy giant’s Whiting Refinery in Whiting, IN.

The company will also have interests in four offshore crude pipeline systems and one offshore natural gas pipeline system that links offshore production resources, located off the coast of the Gulf of Mexico, with the Gulf Coast refining and distribution hubs. (Read more BP Midstream Partners' IPO Plans for US Pipelines on Track.)

2. European oil giant Royal Dutch Shell plc recently opened its first service station in Mexico. With this latest move, the company sets foot in the Mexican retail fuel market. This is a milestone event for Shell since Mexico is the second-largest economy in Latin America and its gasoline market is the fifth-largest in the world. The development is likely to offer the company multiple growth opportunities and boost its revenues.

The company’s first gas station includes a convenience store and is located in the northwestern suburb of Mexico City. With this development, motorists in the country will now be able to avail Shell’s high-grade gasoline and diesel fuels. The convenience store which is likely to offer freshly-brewed gourmet coffee, healthy fresh food and free Wi-Fi also promises superior retail experience to customers.

Shell is touted as the largest fuel retailer in the world with over 43,000 gas stations in around 80 countries worldwide. The company will also be expanding its network of service stations in other developing economies like India, Brazil, China and Indonesia over the next decade. In Mexico, Shell intends to invest around $1 billion over the next 10 years as part of its retail expansion plans. (Read more: Shell Makes a Foray Into Mexico Retail Fuel Market.)

3. Canadian oil major, Cenovus Energy Inc. CVE recently agreed to divest its heavy oil properties in Pelican Lake and other eclectic assets to Canadian Natural Resources Ltd. CNQ for C$975 million ($787 million) in cash, putting earlier speculation to rest. The deal is expected to be over by Sep 30, 2017.

Cenovus' wholly owned Pelican Lake property – which currently produce 19,600 barrels of oil equivalent (BOE) heavy oil per day – is located approximately 300 kilometers north of Edmonton.

The deal is in line with Cenovus' strategy of divesting C$5 billion to back up the C$16.8 billion acquisition of Foster Creek Christina Lake assets from ConocoPhillips in March 2017. The Zacks Rank #3 (Hold) company plans to use the cash to partially pay down the $3.6 billion bridge loan facility that was part of the ConocoPhillips deal. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors should also know that with the deal, the first of the four key asset sales, Cenovus plans to bring down its net debt to operating earnings ratio below 2 by 2019. (Read more: Cenovus to Sell Pelican Assets to Canadian Natural for C$975M.)

4. In a bid to enhance its directional drilling activities, onshore contract driller Patterson-UTI Energy, Inc. PTEN recently inked a deal to acquire Multi-Shot, LLC. Oilfield service company Multi-Shot operates business as MS Energy Services. Post the announcement of the deal, JPMorgan Chase & Co. upgraded Patterson-UTI from neutral to overweight. Following the developments, shares of the company rose by 6.65% to eventually close at $17 on Sep 5.

The $215 million acquisition deal will be funded by a combination of cash and stock without the assumption of any debt of MS Energy. Patterson-UTI will make cash payment of $75 million and will offer 8.8 million shares of its common stock based on the closing price of $15.94 as on Sep 1. Subject to satisfactory closing conditions and regulatory approvals, the transaction is likely to close by the fourth quarter this year.

The MS Energy buy bodes well for Patterson-UTI, given the compelling strategic rationale of the transaction. Apart from bolstering its scale and customer base, the buyout will help Patterson-UTI to enhance its presence in North American markets. MS Energy’s complimentary assets, skilled manpower and technological expertise are expected to strengthen the portfolio of Patterson-UTI, thus bolstering its future revenue growth opportunities.

MS Energy’s standout technology and proprietary design will broaden the service offerings of Patterson-UTI and position it undertake unconventional drilling operations in the North American markets. (Read more: Patterson-UTI Rallies on MS Energy Acquisition Deal.)

5. Oil refining and marketing giant Marathon Petroleum Corp. MPC recently took a final call regarding retaining its retail network unit — Speedway LLC — as a fully-integrated business within the company. The company had been contemplating the spin-off of Speedway of late due to pressure from hedge fund Elliott Management. However, the downstream operator now plans to retain the convenience store based on a recommendation by an independent special committee.

Based in Ohio, Speedway is the second-largest gasoline and convenience store chain in the United States with around 2,730 stores across 21 states. The unit provides support to the company’s earnings in times of high volatility in commodity prices. Having Speedway integrated into its chain of business along with refining operations will lead to ample cost savings. Thus, the committee believed that the Speedway spin-off would make the company vulnerable to industry downturns and lead to considerable loss of integration synergies.

The committee estimated that the spin-off would cost Marathon Petroleum $270-$390 million per year and result into long-term deterioration in shareholders’ value. The move would also result in lower dividends and cash flows. (Read more: Marathon Petroleum Decides Against Speedway Unit Spin-Off.)

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

+3.3%

-2.9%

CVX

+3%

+1.7%

COP

+1.9%

-1.6%

OXY

+1%

-3.5%

SLB

+2.1%

-16.4%

RIG

+3.8%

-30.7%

VLO

+2.1%

+4.9%

ANDV

+1.4%

+24.7%

The Energy Select Sector SPDR – a popular way to track energy companies – generated a +2.3% return last week. The best performer was offshore drilling rig operator Transocean Ltd. RIG whose stock rose by 3.8%.

Longer-term, over the last 6 months, the sector tracker lost 7.1%. Ironically, it was again Transocean, which was the major laggard during this period, experiencing a 30.7% 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 and monthly reports from energy watchdogs OPEC and the IEA.

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