Oil & Gas Stock Roundup: Halliburton, Baker Hughes Merge to Create Oilfield Heavyweight

The world's second-biggest oilfield services provider Halliburton Co.’s (HAL) acquisition of Baker Hughes Inc. (BHI) – the No. 3 player – for $34.6 billion in cash and stock, was the week’s top story.

Overall, it was a bearish week for the sector. West Texas Intermediate (WTI) crude futures declined for the seventh consecutive week – this time by 3.6% – to close at $75.82 per barrel, while natural gas prices lost 8.9% to $4.02 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: EOG Reports Strong Q3, Plains All American Buys Pipeline Stake.)

Oil prices further extended their weekly losses and fell to their lowest level since Sep 2010 on plentiful supplies and lackluster demand expectations. Moreover, a stronger dollar has made the greenback-priced crude dearer for investors holding foreign currency. Oil traders got further spooked after signs of a slowdown in China’s economy.

Natural gas also fared badly, tumbling from their four-month highs after another above-average supply increase. The commodity was also depressed by expectations of lukewarm heating demand across the U.S. with forecasts of warmer weather by the end of this month.

Recap of the Week’s Most Important Stories

1. After days of speculation and the recent hostile bid, oilfield service behemoth Halliburton Co. and its smaller rival Baker Hughes Inc. confirmed that they have entered into a merger agreement. The stock and cash agreement has an equity value of $34.6 billion. Halliburton has offered $78.62 for every Baker Hughes’ share, a substantial premium considering that the latter closed at $65.23 on Nov 17.

A combination with Baker Hughes would provide the world’s second-biggest provider of oilfield services the much-needed boost in taking on the largest player in the field, Schlumberger Ltd. The merger would increase the breadth and depth of the product portfolio of the combined entity, thus increasing leverage.

Moreover, Halliburton expects the combined company to achieve cost synergies of about $2 billion per year. This should aid financials considering that major upstream players are cutting capital spending in this depressed pricing market.

2. U.S. energy giant Chevron Corp. (CVX) declared the commencement of first oil and natural gas production from the Tubular Bells deepwater development situated in the U.S. Gulf of Mexico (GoM). Chevron has a 42.86% ownership in the project whereas upstream energy firm Hess Corporation (HES) is the operator of the development with 57.14 % interest.

Tubular Bells is an oil and gas field located at water depth of roughly 4,300 feet in the Mississippi Canyon region. The field – with estimated production life of 25 years − was discovered in 2003 and the development of the project started in Oct 2011. Tubular Bells field, consisting of three wells, is expected to produce roughly 50,000 barrels of oil-equivalent per day.

3. Oil giant BP plc’s (BP) ongoing court case tied to its 2010 Gulf of Mexico (GoM) oil spill suffered a setback on Thursday. U.S. District Judge Carl Barbier in New Orleans refused to reverse his earlier verdict that the company had been reckless as well as negligent.

The oil firm had earlier agreed to pay $4 billion in criminal fines. However, with judge Barbier upholding his earlier verdict, another $18 billion of penalties for violating the federal Clean Water Act could be slapped on the company. (See More: BP GoM Unfavorable Spillover Ruling Upheld by Judge Barbier.)

4. Denbury Resources Inc. (DNR) – a predominantly oil exploration and production company – announced plans for 2015 whereby it would reduce capital spending by 50% year over year to $550 million, target relatively flat production, and increase annual dividend rate by 60% to $0.40 per share.

The downward revision in capital spending was due to the recent decline and uncertainty around future oil prices. In the third quarter of 2014, oil price realization averaged $90.92 per barrel, reflecting a fall of 14.1% year over year. The company expects 2014 production around 74,283 barrels of oil equivalent per day, in line with the year-to-date daily output rate. The full-year capital expenditure is expected at $1.1 billion. (See More: Denbury Resources Cuts 2015 Capital Spending, Ups Dividend.)

5. Brazilian state-run energy giant Petrobras (PBR) has postponed its third-quarter 2014 earnings for a month amid escalating tensions owing to a multibillion-dollar money laundering and bribery case embroiling it. Petrobras was slated to release its third-quarter earnings last Friday but is now expected to provide the unaudited report on Dec 12. Following the announcement, Petrobras ADR dipped more than 6% during intraday trading on the NYSE on Friday to touch a 52-week low of $9.51 per ADR.

Renato Duque − former director of engineering and services at the company – was arrested last Friday while 30 police teams was conducting a corruption investigation across Brazil. The detention of Duque was the second arrest of a former top Petrobras executive in 2014. (See More: Petrobras Slips on Delay in Q3 Results Amid Investigations.)

Price Performance

The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.

Company	Last Week	Last 6 Months
XOM	-0.69%	-5.71%
CVX	-1.50%	-5.86%
COP	+0.18%	-8.94%
OXY	-2.37%	-10.46%
SLB	-1.95%	-4.65%
RIG	-9.19%	-36.76%
VLO	-1.30%	-10.04%
TSO	+2.28%	+30.70%

Refiner Tesoro Corp. (TSO) was the week's best performer among the market heavyweights, adding 2.3% to its stock price. With refiners being buyers of crude, falling commodity price has triggered hopes for better margins. On the other hand, the biggest loser was offshore driller Transocean Ltd., which fell 9.2% during the period. With oil prices down 30% since June and energy companies cutting costs by scaling back drilling, the likes of Transocean is having to deal with less orders.

Over the last 6 months, Tesoro was again the leader of the pack with its shares advancing 30.7%. Investors have rewarded the company for its continued focus on shareholder returns. Similarly, Transocean was the laggard, as it witnessed a 36.8% price decline over the same time frame on the back of rig oversupply that has led the industry into a cyclical downturn.

What’s Next in the Energy World?

Apart from the usual releases in this week – the U.S. government data on oil and natural gas – market participants will be closely tracking a series of crucial economic reports, including those on inflation, housing and industrial production.

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