It was a week where oil prices rose to its highest since mid-November, while natural gas futures dropped.
On the news front, offshore driller Transocean Ltd. RIG clinched twin contracts from Petrobras, while Italian energy major Eni SpA E announced a major oil find in Angola.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures gained 4.4% to close at $58.52 per barrel, natural gas prices lost 2.4% to $2.795 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Big Oil's Strategy Updates, Conoco's Venezuela Win & More)
The U.S. crude benchmark rallied to four-month highs, after government data showed a surprise draw in crude inventories and a pullback in production from record levels. Oil was also pushed up by the so-called OPEC+ deal that is cutting production by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran continue to tighten the oil further.
However, natural gas prices dropped on smaller-than-expected decrease in supplies and forecasts of warmer weather, which might lead to the heating fuel’s tepid demand.
Recap of the Week’s Most Important Stories
1. Transocean recently clinched twin contracts for its ultra-deepwater rigs from the Brazilian oil giant Petrobras PBR. Post the announcement, shares of the offshore drilling powerhouse rose 6.54%.
Notably, the company secured contracts for two of its drillships, namely Mykonos and Corcovado, which was acquired as part of Ocean Rig buyout in December 2018. Both the rigs are set to commence operations offshore Brazil in November 2019. The deal further cements the company’s relationship with Petrobras, in turn boosting revenues.
Importantly, the estimated backlog for 629-day Corcovado contract is $123 million, reflecting a dayrate of $195,548. The projected value for 550-day Mykonos award is $118 million, depicting a dayrate of $214,545. The Mykonos and Corcovado awards include priced options for 815 days and 680 days, respectively. (Read more Transocean Secures Twin Contracts Worth $241M From Petrobras)
2. Eni SpA made an important oil discovery in Block 15/06 in the Agogo exploration prospect, located in Angola’s deep water. The find is estimated to hold light oil in place in the range of 450-650 million barrels with expected further upside potential.
The Agogo-1 NFW well, which led to the discovery, is located about 180 kilometers off the coast and about 20 kilometers west from the N’Goma FPSO (West Hub). Following Kalimba and Afoxe, Agogo represents the third find of commercial nature since the partners of Block 15/06 decided to begin an exploration campaign in 2018.
In another announcement, the company stated that it has inked a farm out agreement with Qatar Petroleum. Per the terms, Qatar Petroleum will acquire a stake of 30% in Tarfaya Offshore Shallow Petroleum Agreement, which involves 12 exploration blocks in the offshore of Morocco.
Located in the southern part of the Moroccan offshore shallow waters, the Tarfaya Area lies in water depth of about 1,000 meters and is spread across an area of about 23,900 square kilometers. (Read more Eni Strikes Oil in Angola, Sells Stake in Tarfaya Area)
3. Royal Dutch Shell plc RDS.A and its partners in the major LNG Canada project intend to decide within 2025 whether to boost its capacity via doubling it, per Reuters. Shell, which carries a Zacks Rank #3 (Hold), is building the LNG export terminal on the west coast of the country. The facility is located in Kitimat, British Columbia.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Currently, production capacity at the facility is expected at 14 million tons per annum from the first two trains, while first export is anticipated to occur in 2025. The second phase is expected to add two more trains and increase its capacity to 28 million tons. A final investment decision on the second phase is expected before the first phase comes online. Notably, the facility has the potential to include two more trains after the second phase.
The project, wherein Shell actively worked its way to lower costs and take advantage of the tax breaks announced by the government of British Columbia, is expected to cash in on the improving energy landscape and booming global demand for liquefied natural gas, especially in the growing markets of Asia.
Moreover, the exporting facility is strategically situated in a prime location, which provides a shipping route that is around 50% shorter than the U.S. Gulf of Mexico, while avoiding the Panama Canal. The project will liquify and carry the gas from Montney and other fields to the Asian markets. (Read more Shell to Decide on LNG Canada 2nd Phase By 2025)
4. EQM Midstream Partners, LP EQM announced its decision to purchase controlling stakes in two key pipelines that are connecting major natural gas producing shale plays like Utica and Marcellus. For the transaction with Morgan Stanley Infrastructure Partners, EQM Midstream is willing to pay $1.03 billion — comprising cash consideration of $860 million and $170 million of debt assumption. The agreement, which is awaiting customary regulatory and several closing conditions, is likely to get consummated on or around Apr 15, 2019.
As part of the accord, EQM Midstream decided to acquire entire stake in Hornet Midstream Holdings and 60% interest in Eureka Midstream Holdings. Notably, Eureka Midstream is a gathering pipeline network, spreading across 190 miles in West Virginia and Ohio that provides midstream services to prolific shale resources like Marcellus and Utica. The Hornet Midstream, linking the Eureka Midstream pipeline, is a high-pressure gathering network that covers roughly 15 miles in West Virginia.
There is an increasing demand for fresh pipeline networks in the Appalachian Basin — comprising Marcellus and Utica shale plays. This is because these regions are facing pipeline bottlenecks, owing to surge in production of natural gas volume in the past several years. (Read more Can EQM Midstream Gain From $1B Pipeline Asset Purchase?)
5. Despite being scarred by a multibillion-dollar corruption scandal and huge debt burden, it seems that Petrobras’ committed efforts to improve operational efficiency and financials are paying off well. Shares of the Brazilian oil giant moved up 5.94%, after the company approved its Resilience Plan (from 2019 to 2023) to maximize its shareholders’ value.
Per the plan, Petrobras plans to slash operating expenses by $8.1 billion for its five-year plan through 2023. The original estimate for the same was $122.6 billion. The cost control will be aided by layoffs, lower advertisement/sponsorship costs, digital transformation and other practices.
The state-owned company plans to expand its divestment plan of $26.9 billion to further trim its debt load, streamline portfolio and sharpen its focus on other profitable segments for achieving top-tier results. As such, Petrobras will be jettisoning more non-core downstream and midstream assets, along with stakes in some mature oil and gas fields.
While the company is pursuing aggressive divestment and cost containment initiatives, its investment program for the five-year period ending 2023 remains unchanged, with the only exception being the postponement of the installation of fifth production platform at the Buzios pre-salt field by a year to 2022. (Read more Petrobras to Cut Costs and Rev Up Divestments to Deleverage)
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
In line with the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +3.3% return last week. The best performer was offshore driller Transocean whose stock jumped 11.2%.
But longer-term, over six months, the sector tracker is down 11.6%. Oilfield service biggie Schlumberger SLB was the major loser during this period, experiencing a 29.2% 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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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
Schlumberger Limited (SLB) : Free Stock Analysis Report
Eni SpA (E) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Transocean Ltd. (RIG) : Free Stock Analysis Report
EQT Midstream Partners, LP (EQM) : Free Stock Analysis Report
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